UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | ||
Commission File Number: 000-50058 |
Portfolio Recovery Associates, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 75-3078675 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
120 Corporate Boulevard, Norfolk, Virginia | 23502 | |
(Address of principal executive offices) | (zip code) |
(888) 772-7326
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X]þ NO [ ]o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES [X]þ NO [ ]o
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding as of | |
Common Stock, $0.01 par value |
PORTFOLIO RECOVERY ASSOCIATES, INC.
INDEX
Page(s) | ||||||
PART I. | FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | |||||
Consolidated | 3 | |||||
Consolidated Income Statements | 4 | |||||
Consolidated Statements of Cash Flows (unaudited) | 5 | |||||
Notes to Consolidated Financial Statements (unaudited) | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | |||||
Item 4. | Controls and Procedures | |||||
PART II. | OTHER INFORMATION | |||||
Item 6. | Exhibits and Reports on Form 8-K | |||||
33 | ||||||
SIGNATURES | 34 |
2
PORTFOLIO RECOVERY ASSOCIATES, INC.
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 56,765,251 | $ | 24,911,841 | $ | 61,093,438 | $ | 24,512,575 | ||||||||
Investments | — | 23,950,000 | ||||||||||||||
Finance receivables, net | 95,311,731 | 92,568,557 | 107,344,401 | 105,188,906 | ||||||||||||
Property and equipment, net | 6,033,162 | 5,166,380 | 6,056,735 | 5,752,489 | ||||||||||||
Deferred tax asset | — | 2,009,426 | ||||||||||||||
Income tax receivable | — | 351,861 | ||||||||||||||
Goodwill | 6,397,138 | 6,397,138 | ||||||||||||||
Intangible assets, net | 5,873,980 | 6,318,838 | ||||||||||||||
Other assets | 827,002 | 1,385,706 | 2,716,936 | 3,056,023 | ||||||||||||
Total assets | $ | 158,937,146 | $ | 126,393,771 | $ | 189,482,628 | $ | 175,175,969 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Liabilities: | ||||||||||||||||
Accounts payable | $ | 1,175,776 | $ | 1,290,332 | $ | 1,753,492 | $ | 1,413,726 | ||||||||
Accrued expenses | 1,213,432 | 513,687 | 1,703,042 | 1,563,285 | ||||||||||||
Income taxes payable | 147,729 | — | 2,765,676 | 182,221 | ||||||||||||
Accrued payroll and bonuses | 3,916,275 | 3,233,409 | 3,128,263 | 4,475,919 | ||||||||||||
Deferred tax liability | 9,719,605 | — | 15,676,237 | 13,650,722 | ||||||||||||
Long-term debt | 2,049,746 | 1,656,972 | 1,797,403 | 1,924,422 | ||||||||||||
Obligations under capital lease | 626,978 | 551,325 | 525,878 | 576,234 | ||||||||||||
Total liabilities | 18,849,541 | 7,245,725 | 27,349,991 | 23,786,529 | ||||||||||||
Commitments and contingencies (Note 8) | ||||||||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, par value $0.01, authorized shares, 2,000,000, issued and outstanding shares - 0 | — | — | — | — | ||||||||||||
Common stock, par value $0.01, authorized shares, 30,000,000, issued and outstanding shares - 15,352,475 at September 30, 2004, and 15,294,676 at December 31, 2003 | 153,525 | 152,947 | ||||||||||||||
Common stock, par value $0.01, authorized shares, 30,000,000, issued and outstanding shares - 15,579,610 at March 31, 2005, and 15,498,210 at December 31, 2004 | 155,796 | 154,982 | ||||||||||||||
Additional paid in capital | 97,320,816 | 96,117,932 | 102,728,402 | 100,905,851 | ||||||||||||
Retained earnings | 42,613,264 | 22,877,167 | 59,248,439 | 50,328,607 | ||||||||||||
Total stockholders’ equity | 140,087,605 | 119,148,046 | 162,132,637 | 151,389,440 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 158,937,146 | $ | 126,393,771 | $ | 189,482,628 | $ | 175,175,969 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
PORTFOLIO RECOVERY ASSOCIATES, INC.
Three Months | Three Months | Nine Months | Nine Months | Three Months | Three Months | |||||||||||||||||||
Ended | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | March 31, | March 31, | |||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Income recognized on finance receivables | $ | 27,069,524 | $ | 21,388,674 | $ | 77,867,413 | $ | 59,624,690 | $ | 32,249,670 | $ | 23,907,586 | ||||||||||||
Commissions | 1,216,054 | 784,411 | 3,826,564 | 2,266,998 | 3,528,698 | 1,357,247 | ||||||||||||||||||
Total revenue | 28,285,578 | 22,173,085 | 81,693,977 | 61,891,688 | 35,778,368 | 25,264,833 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Compensation and employee services | 9,154,696 | 7,369,517 | 26,902,987 | 21,441,422 | 10,860,931 | 8,537,259 | ||||||||||||||||||
Outside legal and other fees and services | 5,347,702 | 3,885,920 | 15,038,953 | 9,979,781 | 7,161,783 | 4,241,301 | ||||||||||||||||||
Communications | 840,321 | 702,739 | 2,658,619 | 2,003,116 | 1,057,899 | 1,007,504 | ||||||||||||||||||
Rent and occupancy | 434,541 | 317,300 | 1,296,577 | 872,260 | 475,765 | 428,998 | ||||||||||||||||||
Other operating expenses | 648,512 | 392,872 | 2,028,266 | 1,321,832 | 752,854 | 690,651 | ||||||||||||||||||
Depreciation | 487,757 | 383,071 | 1,398,091 | 1,054,253 | ||||||||||||||||||||
Depreciation and amortization | 940,721 | 447,678 | ||||||||||||||||||||||
Total operating expenses | 16,913,529 | 13,051,419 | 49,323,493 | 36,672,664 | 21,249,953 | 15,353,391 | ||||||||||||||||||
Income from operations | 11,372,049 | 9,121,666 | 32,370,484 | 25,219,024 | 14,528,415 | 9,911,442 | ||||||||||||||||||
Other income and (expense): | ||||||||||||||||||||||||
Interest income | 77,259 | 586 | 105,841 | 28,811 | 95,612 | 3,583 | ||||||||||||||||||
Interest expense | (69,383 | ) | (83,989 | ) | (206,451 | ) | (243,226 | ) | (63,894 | ) | (69,387 | ) | ||||||||||||
Income before income taxes | 11,379,925 | 9,038,263 | 32,269,874 | 25,004,609 | 14,560,133 | 9,845,638 | ||||||||||||||||||
Provision for income taxes | 4,405,160 | 3,509,070 | 12,533,777 | 9,732,395 | 5,640,301 | 3,834,530 | ||||||||||||||||||
Net income | $ | 6,974,765 | $ | 5,529,193 | $ | 19,736,097 | $ | 15,272,214 | $ | 8,919,832 | $ | 6,011,108 | ||||||||||||
Net income per common share | ||||||||||||||||||||||||
Basic | $ | 0.45 | $ | 0.36 | $ | 1.29 | $ | 1.07 | $ | 0.57 | $ | 0.39 | ||||||||||||
Diluted | $ | 0.44 | $ | 0.35 | $ | 1.25 | $ | 0.97 | $ | 0.55 | $ | 0.38 | ||||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||||||
Basic | 15,341,801 | 15,148,978 | 15,322,675 | 14,311,587 | 15,531,779 | 15,303,886 | ||||||||||||||||||
Diluted | 15,831,660 | 15,750,647 | 15,793,935 | 15,697,162 | 16,152,162 | 15,774,487 |
The accompanying notes are an integral part of these consolidated financial statements.
4
PORTFOLIO RECOVERY ASSOCIATES, INC.
2004 | 2003 | 2005 | 2004 | |||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 19,736,097 | $ | 15,272,214 | $ | 8,919,832 | $ | 6,011,108 | ||||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||||||
Increase in equity from vested options and warrants | 456,379 | 302,380 | 133,038 | 124,916 | ||||||||||||
Income tax benefit from stock option exercises | 437,514 | 15,397,882 | 777,137 | 149,491 | ||||||||||||
Depreciation | 1,398,091 | 1,054,253 | ||||||||||||||
Deferred tax expense (benefit) | 11,729,031 | (5,700,964 | ) | |||||||||||||
Depreciation and amortization | 940,721 | 447,679 | ||||||||||||||
Deferred tax expense | 2,025,515 | 3,685,038 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Other assets | 558,704 | (132,918 | ) | 339,086 | (90,193 | ) | ||||||||||
Accounts payable | (114,556 | ) | (209,162 | ) | 339,766 | (634,709 | ) | |||||||||
Income taxes | 499,590 | (2,793,528 | ) | 2,583,455 | (5,643 | ) | ||||||||||
Accrued expenses | 699,745 | (149,447 | ) | 139,757 | (121,504 | ) | ||||||||||
Accrued payroll and bonuses | 682,866 | (477,920 | ) | (1,347,656 | ) | (1,536,796 | ) | |||||||||
Net cash provided by operating activities | 36,083,461 | 22,562,790 | 14,850,651 | 8,029,387 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property and equipment | (1,967,964 | ) | (2,129,692 | ) | (800,109 | ) | (862,307 | ) | ||||||||
Acquisition of finance receivables, net of buybacks | (37,626,129 | ) | (50,849,497 | ) | (17,735,629 | ) | (14,678,341 | ) | ||||||||
Collections applied to principal on finance receivables | 34,882,955 | 26,539,314 | 15,580,134 | 11,619,112 | ||||||||||||
Sales of auction rate certificates | 23,950,000 | — | ||||||||||||||
Net cash used in investing activities | (4,711,138 | ) | (26,439,875 | ) | ||||||||||||
Net cash provided by/(used in) investing activities | 20,994,396 | (3,921,536 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Public offering costs | — | (386,963 | ) | |||||||||||||
Proceeds from exercise of options and warrants | 309,570 | 586,000 | 913,191 | 124,790 | ||||||||||||
Proceeds from long-term debt | 750,000 | 975,000 | — | 750,000 | ||||||||||||
Payments on long-term debt | (357,226 | ) | (196,884 | ) | (127,019 | ) | (110,949 | ) | ||||||||
Payments on capital lease obligations | (221,257 | ) | (228,439 | ) | (50,356 | ) | (92,684 | ) | ||||||||
Net cash provided by financing activities | 481,087 | 748,714 | 735,816 | 671,157 | ||||||||||||
Net increase/(decrease) in cash and cash equivalents | 31,853,410 | (3,128,371 | ) | |||||||||||||
Net increase in cash and cash equivalents | 36,580,863 | 4,779,008 | ||||||||||||||
Cash and cash equivalents, beginning of period | 24,911,841 | 17,938,730 | 24,512,575 | 24,911,841 | ||||||||||||
Cash and cash equivalents, end of period | $ | 56,765,251 | $ | 14,810,359 | $ | 61,093,438 | $ | 29,690,849 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid for interest | $ | 206,451 | $ | 240,503 | $ | 63,894 | $ | 69,387 | ||||||||
Cash paid for income taxes | $ | 280,642 | $ | 1,219,772 | $ | 254,950 | $ | 5,643 | ||||||||
Noncash investing and financing activities: | ||||||||||||||||
Capital lease obligations incurred | $ | 296,910 | $ | 362,813 | $ | — | $ | 296,910 |
The accompanying notes are an integral part of these consolidated financial statements.
5
PORTFOLIO RECOVERY ASSOCIATES, INC.
1. Organization and Business:
Portfolio Recovery Associates, LLC (“PRA”) was formed on March 20, 1996. Portfolio Recovery Associates, Inc. (“PRA Inc”) was formed in August 2002. On November 8, 2002, PRA Inc completed its initial public offering (“IPO”) of common stock. As a result, all of the membership units and warrants of PRA were exchanged on a one to one basis for warrants and shares of a single class of common stock of PRA Inc. PRA Inc now owns all outstanding membership units of PRA, and PRA Receivables Management, LLC (d/b/a Anchor Receivables Management) (“Anchor”) and PRA Location Services, LLC (d/b/a IGS Nevada) (“IGS”). PRA Inc, a Delaware corporation, and its subsidiaries (collectively, the “Company”) purchases, collects and manages portfolios of defaulted consumer receivables.receivables and provides asset-location and debt resolution services. The defaulted consumer receivables the Company collects are either purchased from the sellers of finance receivables or are collected on behalf of clients on a commission fee basis. This is primarily accomplished by maintaining a staff of highly skilled collectors whose purpose is to locate and contact the customers and arrange payment or resolution of the debt. Secondarily, theThe Company has also contracted with independent attorneys with which the Company can undertake legal action in order to satisfy the outstanding debt.
The consolidated financial statements of the Company include the accounts of PRA Inc, PRA, PRA Holding I, Anchor and Anchor.IGS.
The accompanying unaudited financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial positionbalance sheet as of September 30, 2004,March 31, 2005, its results of operationsincome statements for the three and nine month periods ended September 30,March 31, 2005 and 2004 and 2003, and its statements of cash flows for the ninethree month periods ended September 30,March 31, 2005 and 2004, and 2003, respectively. The results of operationsincome statements of the Company for the three and nine month periods ended September 30,March 31, 2005 and 2004 and 2003 may not be indicative of future results. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as amended, filed for the year ended December 31, 2003.2004.
2. Finance Receivables:Receivables, net:
The Company accountsacquires loans that have experienced deterioration of credit quality between origination and the Company’s acquisition of the loans. The amount paid for a loan reflects the Company’s determination that it is probable the Company will be unable to collect all amounts due according to the loan’s contractual terms. At acquisition, the Company reviews each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio of loans and subsequently aggregated pools of loans. The Company determines the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference) based on the Company’s proprietary acquisition models. The remaining amount, representing the excess of the loan’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining life of the loan or pool (accretable yield).
Prior to January 1, 2005, the Company accounted for its investment in finance receivables using the interest method under the guidance of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.” StaticEffective January 1, 2005, the Company adopted and began to account for its investment in finance receivables using the interest method under the guidance of American Institute of Certified Public Accountants (“AICPA”)
6
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Statement of Position (“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” For loans acquired in fiscal years beginning prior to December 15, 2004, Practice Bulletin 6 is still effective; however, Practice Bulletin 6 was amended by SOP 03-03 as described further in this note. For loans acquired in fiscal years beginning after December 15, 2004, SOP 03-03 is effective. Under the guidance of SOP 03-03 (and the amended Practice Bulletin 6), static pools of relatively homogenous accounts are established. Once a static pool is established, the receivable accounts in the poolThese pools are not changed.aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-03 (and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. The SOP initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning after December 15, 2004 under SOP 03-03 and the amended Practice Bulletin 6, rather than lowering the estimated IRR if the collection estimates are not received, the carrying value of a pool would be written down to maintain the then current IRR. Income on finance receivables is accrued monthlyquarterly based on each static pool’s effective interest rate. This interest rate is estimated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. MonthlyIRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. Likewise, monthly cash flows that are less than the monthly accrual will accrete the carrying balance. Each poolThe IRR is reviewed monthlyestimated and compared toperiodically recalculated based on the timing and amount of anticipated cash flows using the Company’s models to drive complete amortization of theproprietary collection models. A pool can become fully amortized (zero carrying balance aton the end of each pool’s life. Thebalance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Company uses the cost recovery method prescribed by Practice Bulletin 6 is used when collections on a particular portfoliopool of accounts cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio. Additionally, a pool can become fully amortized (zero carrying balanceportfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the Statementinterest method as described above. At March 31, 2005, the Company had unamortized purchase price of Financial Position) while still generating$2,563,884 in pools accounted for under the cost recovery method.
The Company establishes valuation allowances for all acquired loans subject to SOP 03-03 to reflect only those losses incurred after acquisition (that is, the present value of cash collections. In this case, all cash collectionsflows initially expected at acquisition that are recognized as revenue when received.
Inno longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the loans. At March 31, 2005, the Company had no valuation allowance on its finance receivables. Prior to January 1, 2005, in the event that anticipatedestimated future cash collections would be inadequate to amortize the carrying balance, an impairment charge would be taken with a corresponding write-off of the receivable balance. Accordingly, the Company does not maintain an allowance for credit losses.
6
PORTFOLIO RECOVERY ASSOCIATES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest method. During the three and nine months ended September 30, 2004, respectively, the Company capitalized $354,751 and $688,765 of these direct acquisition fees. During the three and nine months ended September 30, 2003, respectively, the Company capitalized $192,491 and $1,005,048 of these direct acquisition fees. During the three and nine months ended September 30, 2004, respectively, the Company amortized $163,906 and $734,312 of these direct acquisition fees. During the three and nine months ended September 30, 2003, respectively, the Company amortized $286,653 and $841,362 of these direct acquisition fees. The balance of the unamortized capitalized fees at September 30,March 31, 2005 and 2004 was $1,017,052 and 2003, respectively, was $1,225,998$1,599,357, respectively. During the quarters ended March 31, 2005 and $1,830,369. During 2004 the Company wrote-off $530,580 related tocapitalized $85,536 and $75,638, respectively, of these direct acquisition fees. During the capitalizationquarter ended March 31, 2005 and 2004 the Company amortized $167,000 and $278,475, respectively, of fees paid to third parties for address correction and other customer data associated with thethese direct acquisition of portfolios purchased over the past 5 years.fees.
The agreements to purchase the aforementioned receivables typically include general representations and warranties from the sellers covering account holder death or bankruptcy and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days. Any funds received from the seller of finance receivables as a return of purchase price are referred to as buybacks. Buyback funds are simply applied against the finance receivable balance received and are not included in the Company’s cash collections from operations. In some cases, the seller will replace the returned accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed from the pool and the new account is added.
Gains on sale7
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of March 31, 2005 and 2004, the Company had $107,344,401 and $95,627,786, respectively, remaining of finance receivables, representing the difference between the sales price and the unamortized value of the finance receivables sold, are recognized when finance receivables are sold.
The Company applies a financial components approach that focuses on control when accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, eliminates financial assets when control has been surrendered, and eliminates liabilities when extinguished. This approach provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Importantly, these funds derived from sales are not included in our cash collections from finance receivables figure. They are reported separately under FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”
receivables. Changes in finance receivables for the threeat March 31, 2005 and nine months ended September 30, 2004 and 2003 were as follows:
Three Months | Three Months | Nine Months | Nine Months | Three Months | Three Months | |||||||||||||||||||
Ended | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | March 31, | March 31, | |||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||||||||||||||||||
Balance at beginning of period | $ | 96,270,285 | $ | 86,688,557 | $ | 92,568,557 | $ | 65,526,235 | ||||||||||||||||
Balance at beginning of year | $ | 105,188,906 | $ | 92,568,557 | ||||||||||||||||||||
Acquisitions of finance receivables, net of buybacks | 10,821,842 | 11,978,443 | 37,626,129 | 50,849,497 | 17,735,629 | 14,678,341 | ||||||||||||||||||
Cash collections | (38,849,920 | ) | (30,219,256 | ) | (112,750,368 | ) | (86,164,004 | ) | (47,829,804 | ) | (35,526,698 | ) | ||||||||||||
Income recognized on finance receivables | 27,069,524 | 21,388,674 | 77,867,413 | 59,624,690 | 32,249,670 | 23,907,586 | ||||||||||||||||||
Cash collections applied to principal | (11,780,396 | ) | (8,830,582 | ) | (34,882,955 | ) | (26,539,314 | ) | (15,580,134 | ) | (11,619,112 | ) | ||||||||||||
Balance at end of period | $ | 95,311,731 | $ | 89,836,418 | $ | 95,311,731 | $ | 89,836,418 | ||||||||||||||||
Balance at end of year | $ | 107,344,401 | $ | 95,627,786 | ||||||||||||||||||||
At the time of acquisition, the life of each pool is generally set at between 60 and 84 months based upon the proprietary models of the Company. As of September 30, 2004March 31, 2005 the Company has $95,311,731had $107,344,401 in finance receivables included in the Statement of Financial Position.receivables. Based upon current projections, cash collections applied to principal will be as follows for the twelve months in the periods ending:
March 31, 2006 | $ | 35,441,355 | ||
March 31, 2007 | 31,610,568 | |||
March 31, 2008 | 21,824,595 | |||
March 31, 2009 | 9,612,891 | |||
March 31, 2010 | 5,986,128 | |||
March 31, 2011 | 2,868,864 | |||
$ | 107,344,401 | |||
7 Accretable yield represents the amount of income the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of March 31, 2005 and 2004. Changes in accretable yield at March 31, 2005 and 2004 were as follows:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
March 31, | March 31, | |||||||
2005 | 2004 | |||||||
Balance at beginning of period | $ | 202,841,339 | $ | 175,098,132 | ||||
Income recognized on finance receivables | (32,249,670 | ) | (23,907,586 | ) | ||||
Additions | 12,960,224 | 21,289,439 | ||||||
Reclassifications from nonaccretable difference | 22,959,045 | 11,130,901 | ||||||
Balance at end of period | $ | 206,510,938 | $ | 183,610,886 | ||||
During the three months ended March 31, 2005 and 2004, the Company purchased $659.9 million and $613.1 million of face value of charged-off consumer receivables. At March 31, 2005, the estimated remaining collections on the receivables purchased in the three months ended March 31, 2005 and 2004 is $29,980,012 and $27,182,118, respectively.
8
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2005 | $ | 31,304,683 | ||
September 30, 2006 | 30,567,016 | |||
September 30, 2007 | 22,166,778 | |||
September 30, 2008 | 7,618,917 | |||
September 30, 2009 | 2,249,059 | |||
September 30, 2010 | 949,739 | |||
September 30, 2011 | 455,539 | |||
$ | 95,311,731 | |||
3. Revolving Line of Credit:
The Company maintains a $25.0 million revolving line of credit pursuant to an agreement entered into on November 28, 2003.2003 and amended on November 22, 2004. The credit facility bears interest at a spread of 2.50% over LIBOR and extends through November 28, 2004.2006. The agreement calls for:
• | restrictions on monthly borrowings are limited to 20% of Estimated Remaining Collections; | |||
• | a debt coverage ratio of a least 8.0 to 1.0 calculated on a rolling twelve-month average; | |||
• | a debt to tangible net worth ratio of less than 0.40 to 1.00; | |||
• | net income per quarter of at least $1.00, calculated on a consolidated basis, and; | |||
• | restrictions on change of control. |
This facility had no amounts outstanding at September 30, 2004.March 31, 2005. As of September 30, 2004March 31, 2005 the Company is in compliance with all of the covenants of this agreement.
4. Long-Term Debt:
In July 2000, the Company purchased a building in Hutchinson, Kansas. The building was financed with a commercial loan for $550,000 with a variable interest rate based on LIBOR. This commercial loan is collateralized by the real estate in Kansas. Monthly principal payments on the loan are $4,583 for an amortized term of 10 years. A balloon payment of $275,000 is due July 21, 2005, which results in a five-year principal payout. The loan matures July 21, 2005.
On February 9, 2001, the Company purchased a generator for its Norfolk location. The generator was financed with a commercial loan for $107,000 with a fixed rate of 7.9%. This commercial loan is collateralized by the generator. Monthly payments on the loan are $2,170 and the loan matures on February 1, 2006.
On February 20, 2002, the Company completed the construction of a satellite parking lot at its Norfolk location. The parking lot was financed with a commercial loan for $500,000 with a fixed rate of 6.47%. The loan is collateralized by the parking lot. The loan required only interest payments during the first six months. Beginning October 1, 2002, monthly payments on the loan are $9,797 and the loan matures on September 1, 2007.
On May 1, 2003, the Company secured financing for its computer equipment purchases related to the Hampton, Virginia office opening. The computer equipment was financed with a commercial loan for $975,000 with a fixed rate of 4.25%. This loan is collateralized by computer equipment. Monthly payments are $18,096 and the loan matures on May 1, 2008.
On January 9, 2004, the Company entered into a commercial loan agreement in the amount of $750,000 to finance equipment purchases at its newly leased Norfolk facility. This loan bears interest at a fixed rate of 4.45%, matures on January 1, 2009 and is collateralized by the purchased equipment.
8 These five loans are collateralized by the related asset and are subject to the following covenants:
• | net worth greater than $20,000,000, and; | |||
• | a cash flow coverage ratio of at least 1.5 to 1 calculated on a rolling twelve-month average. |
9
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The loans are subject to the following covenants:
5. Property and Equipment:
Property and equipment, at cost, consist of the following as of the dates indicated:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
Software | $ | 2,492,223 | $ | 2,030,403 | $ | 2,660,572 | $ | 2,550,224 | ||||||||
Computer equipment | 2,884,532 | 2,193,386 | 3,178,123 | 2,964,333 | ||||||||||||
Furniture and fixtures | 1,643,560 | 1,283,748 | 1,734,902 | 1,729,792 | ||||||||||||
Equipment | 1,827,358 | 1,602,547 | 2,287,546 | 1,876,081 | ||||||||||||
Leasehold improvements | 1,256,018 | 801,516 | 1,153,996 | 1,146,489 | ||||||||||||
Building and improvements | 1,138,924 | 1,138,924 | 1,193,906 | 1,142,017 | ||||||||||||
Land | 100,515 | 100,515 | 150,922 | 150,922 | ||||||||||||
Less accumulated depreciation | (5,309,968 | ) | (3,984,659 | ) | (6,303,232 | ) | (5,807,369 | ) | ||||||||
Property and equipment, net | $ | 6,033,162 | $ | 5,166,380 | $ | 6,056,735 | $ | 5,752,489 | ||||||||
6. Intangible Assets:
With the acquisition of IGS on October 1, 2004, the Company purchased certain tangible and intangible assets. Intangible assets purchased included client relationships, non-compete agreements and goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company is amortizing the client relationships and non-compete agreements over seven and three years, respectively and reviews them annually for impairment. Total amortization expense was $444,858 and $0 for the three months ended March 31, 2005 and 2004, respectively. In addition, goodwill, pursuant to SFAS 142, is not amortized but rather is reviewed annually for impairment.
7. Stock-Based Compensation:
The Company has a stock option and restricted (nonvested) share plan. The Amended and Restated Portfolio Recovery 2002 Stock Option Plan and 2004 Restricted Stock Plan was approved by the Company’s shareholders at its Annual Meeting of Shareholders on May 12, 2004, enabling the Company to issue to its employees and directors restricted shares of stock, as well as stock options. Also, in connection with the IPO, all existing PRA warrants that were owned by certain individuals and entities were exchanged for an equal number of PRA Inc warrants. Prior to 2002, the Company accounted for stock compensation issued under the recognition and measurement provisions of APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related Interpretations.
Effective January 1, 2002, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified, or settled after January 1, 2002. All stock-based compensation measured under the provisions of APB 25 became fully vested during 2002. All stock-based compensation expense recognized thereafter was derived from stock-based compensation based on the fair value method prescribed in SFAS 123.
Total equity-based compensation expense was $229,853 and $148,998 for the three months ended March 31, 2005 and 2004, respectively.
10
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.
Three Months | Three Months | |||||||
Ended | Ended | |||||||
March 31, | March 31, | |||||||
2005 | 2004 | |||||||
Net income/Pro forma net income: | ||||||||
As reported | $ | 8,919,832 | $ | 6,011,108 | ||||
Add: Stock-based compensation expense included in reported net income, net of related tax effects | 140,813 | 90,969 | ||||||
Less: Total stock based compensation expense determined under intrinsic value method for all awards, net of related tax effects | (140,813 | ) | (90,969 | ) | ||||
Pro forma net income | $ | 8,919,832 | $ | 6,011,108 | ||||
Earnings per share: | ||||||||
Basic — as reported | $ | 0.57 | $ | 0.39 | ||||
Basic — pro forma | $ | 0.57 | $ | 0.39 | ||||
Diluted — as reported | $ | 0.55 | $ | 0.38 | ||||
Diluted — pro forma | $ | 0.55 | $ | 0.38 |
Stock Warrants
The Prior to the IPO, the PRA management committee was authorized to issue warrants to partners, employees or vendors to purchase membership units. Generally, warrants granted had a term between 5 and 7 years and vested within 3 years. Warrants had been issued at or above the fair market value on the date of grant. Warrants vest and expire according to terms established at the grant date. All outstanding warrants were issued to employees ofbecame fully vested at the Company and are fully vested.Company’s IPO in 2002. During the three and nine months ended September 30,March 31, 2005 and 2004, and 2003, no warrants were issued.
Total equity-based compensation was $220,832 and $131,904 for the three months ended September 30, 2004 and 2003, respectively and $516,028 and $313,902 for the nine months ended September 30, 2004 and 2003, respectively.
911
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following summarizes all warrant related transactions from December 31, 2001 through September 30, 2004:March 31, 2005:
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Warrants | Exercise | Warrants | Exercise | |||||||||||||
Outstanding | Price | Outstanding | Price | |||||||||||||
December 31, 2001 | 2,195,000 | $ | 4.17 | 2,195,000 | $ | 4.17 | ||||||||||
Granted | 50,000 | 10.00 | 50,000 | 10.00 | ||||||||||||
Exercised | (50,000 | ) | 4.20 | (50,000 | ) | 4.20 | ||||||||||
Cancelled | (10,000 | ) | 4.20 | (10,000 | ) | 4.20 | ||||||||||
December 31, 2002 | 2,185,000 | 4.30 | 2,185,000 | 4.30 | ||||||||||||
Exercised | (2,026,000 | ) | 4.17 | (2,026,000 | ) | 4.17 | ||||||||||
Cancelled | (51,500 | ) | 9.72 | (51,500 | ) | 9.72 | ||||||||||
December 31, 2003 | 107,500 | 4.20 | 107,500 | 4.20 | ||||||||||||
Exercised | (46,500 | ) | 4.20 | (67,500 | ) | 4.20 | ||||||||||
September 30, 2004 | 61,000 | $ | 4.20 | |||||||||||||
December 31, 2004 | 40,000 | 4.20 | ||||||||||||||
Exercised | (15,000 | ) | 4.20 | |||||||||||||
March 31, 2005 | 25,000 | $ | 4.20 | |||||||||||||
The following information is as of September 30, 2004:March 31, 2005:
Warrants Outstanding | Warrants Exercisable | Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||||||||||||||||||
Weighted- | Weighted- | |||||||||||||||||||||||||||||||||||||||
Average | Weighted- | Weighted- | Average | Weighted- | Weighted- | |||||||||||||||||||||||||||||||||||
Remaining | Average | Average | Remaining | Average | Average | |||||||||||||||||||||||||||||||||||
Exercise | Number | Contractual | Exercise | Number | Exercise | Number | Contractual | Exercise | Number | Exercise | ||||||||||||||||||||||||||||||
Prices | Outstanding | Life | Price | Exercisable | Price | Outstanding | Life | Price | Exercisable | Price | ||||||||||||||||||||||||||||||
$4.20 | 61,000 | 1.53 | $ | 4.20 | 61,000 | $ | 4.20 | 25,000 | 1.0 | $ | 4.20 | 25,000 | $ | 4.20 | ||||||||||||||||||||||||||
Total at September 30, 2004 | 61,000 | 1.53 | $ | 4.20 | 61,000 | $ | 4.20 | |||||||||||||||||||||||||||||||||
Total at March 31, 2005 | 25,000 | 1.0 | $ | 4.20 | 25,000 | $ | 4.20 | |||||||||||||||||||||||||||||||||
Stock Options
The Company created the 2002 Stock Option Plan (the “Plan”) on November 7, 2002. The Plan was amended in 2004 to enable the Company to issue restricted (nonvested) shares of stock to its employees and directors. The Amended Plan was approved by the Company’s shareholders at its Annual Meeting on May 12, 2004. Up to 2,000,000 shares of common stock may be issued under the Amended Plan. The Amended Plan expires November 7, 2012. All options and restricted shares issued under the Amended Plan vest ratably over 5 years. Granted options expire seven years from grant date. Expiration dates range between November 7, 2009 and January 16, 2011. Options granted to a single person cannot exceed 200,000 in a single year. As of September 30, 2004,March 31, 2005, 895,000 options have been granted under the Amended Plan, of which 63,47577,025 have been cancelled.
12
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Options are expensed under SFAS 123 and are included in operating expenses as a component of compensation. The Company issued 0 and 20,000 options to non-employee directors during the three and nine months ended September 30,March 31, 2005 and 2004, respectively. All of the stock options which have been issued under the Plan were issued to employees of the Company except for 40,000 which were issued to non-employee directors.
10
PORTFOLIO RECOVERY ASSOCIATES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
The following summarizes all option related transactions from December 31, 2001 through September 30, 2004:March 31, 2005:
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Options | Exercise | Options | Exercise | |||||||||||||
Outstanding | Price | Outstanding | Price | |||||||||||||
December 31, 2001 | — | $ | — | — | $ | — | ||||||||||
Granted | 820,000 | 13.06 | 820,000 | 13.06 | ||||||||||||
Cancelled | (12,150 | ) | 13.00 | (12,150 | ) | 13.00 | ||||||||||
December 31, 2002 | 807,850 | 13.06 | 807,850 | 13.06 | ||||||||||||
Granted | 55,000 | 27.88 | 55,000 | 27.88 | ||||||||||||
Exercised | (50,915 | ) | 13.00 | (50,915 | ) | 13.00 | ||||||||||
Cancelled | (14,025 | ) | 13.00 | (14,025 | ) | 13.00 | ||||||||||
December 31, 2003 | 797,910 | 14.09 | 797,910 | 14.09 | ||||||||||||
Granted | 20,000 | 28.79 | 20,000 | 28.79 | ||||||||||||
Exercised | (8,790 | ) | 13.00 | (63,511 | ) | 13.30 | ||||||||||
Cancelled | (37,300 | ) | 13.00 | (47,940 | ) | 13.00 | ||||||||||
September 30, 2004 | 771,820 | $ | 14.53 | |||||||||||||
December 31, 2004 | 706,459 | 14.65 | ||||||||||||||
Exercised | (65,400 | ) | 13.00 | |||||||||||||
Cancelled | (2,910 | ) | 13.00 | |||||||||||||
March 31, 2005 | 638,149 | $ | 14.82 | |||||||||||||
The following information is as of September 30, 2004:March 31, 2005:
Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||||||||
Weighted- | Weighted- | |||||||||||||||||||||||||||||||||||||||
Average | Weighted- | Weighted- | Average | Weighted- | Weighted- | |||||||||||||||||||||||||||||||||||
Remaining | Average | Average | Remaining | Average | Average | |||||||||||||||||||||||||||||||||||
Exercise | Number | Contractual | Exercise | Number | Exercise | Number | Contractual | Exercise | Number | Exercise | ||||||||||||||||||||||||||||||
Prices | Outstanding | Life | Price | Exercisable | Price | Outstanding | Life | Price | Exercisable | Price | ||||||||||||||||||||||||||||||
$13.00 | 681,820 | 5.0 | $ | 13.00 | 96,140 | $ | 13.00 | 550,149 | 4.6 | $ | 13.00 | 124,179 | $ | 13.00 | ||||||||||||||||||||||||||
$16.16 | 15,000 | 5.1 | $ | 16.16 | 3,000 | $ | 16.16 | 14,000 | 4.6 | 16.16 | 5,000 | 16.16 | ||||||||||||||||||||||||||||
$26.81 - $29.79 | 75,000 | 6.0 | $ | 28.12 | 11,000 | $ | 27.88 | |||||||||||||||||||||||||||||||||
$27.77 - $29.79 | 74,000 | 5.5 | 28.11 | 14,000 | 28.06 | |||||||||||||||||||||||||||||||||||
Total at September 30, 2004 | 771,820 | 5.1 | $ | 14.53 | 110,140 | $ | 14.57 | |||||||||||||||||||||||||||||||||
Total at March 31, 2005 | 638,149 | 4.7 | $ | 14.82 | 143,179 | $ | 14.58 | |||||||||||||||||||||||||||||||||
The Company utilizes the Black-Scholes option pricing model to calculate the value of the stock options when granted. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options. In addition, changes to the subjective input assumptions can result in materially different fair market value estimates. Therefore, the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options.
Options issue year: | 2004 | 2003 | 2002 | |||||||||
Weighted average fair value of options granted | $ | 2.85 | $ | 5.84 | $ | 2.73 | ||||||
Expected volatility | 13.26% - 13.55 | % | 15.70% - 15.73 | % | 15.70 | % | ||||||
Risk-free interest rate | 3.16% - 3.37 | % | 2.92% - 3.19 | % | 2.92 | % | ||||||
Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
Expected life (in years) | 5.00 | 5.00 | 5.00 |
1113
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Options issue year: | 2004 | 2003 | ||
Weighted average fair value of options granted | $2.85 | $5.84 | ||
Expected volatility | 13.26% - 13.55% | 15.70% - 15.73% | ||
Risk-free interest rate | 3.16% - 3.37% | 2.92% - 3.19% | ||
Expected dividend yield | 0.00% | 0.00% | ||
Expected life (in years) | 5.00 | 5.00 |
Utilizing these assumptions, each employee stock option granted in 20022003 was valued at $2.71 per share and each director stock option granted in 2002 was valued at $3.37 per share. For stock options issued to employees in 2003, the per share values ranged between $5.80 and $6.25. Each non-employee director stock option granted in 2004 iswas valued between $2.62 and $2.92.
Restricted StockNonvested Shares
Restricted stock Nonvested shares are permitted to be issued as an incentive to attract new employees and, effective commensurate with the meeting of shareholders held on May 12, 2004, are permitted to be issued to directors and existing employees as well. The terms of the restrictednonvested share awards are similar to those of the stock option awards, wherein the shares are issued at or above market values and vest ratably over 5 years. Restricted stock isNonvested share grants are expensed over itstheir vesting period.
The following summarizes all restrictednonvested stock transactions from December 31, 2002 through September 30, 2004:March 31, 2005:
Restricted | Weighted | Nonvested | Weighted | |||||||||||||
Shares | Average | Shares | Average | |||||||||||||
Outstanding | Price | Outstanding | Price | |||||||||||||
December 31, 2002 | — | $ | — | — | $ | — | ||||||||||
Granted | 13,045 | 27.57 | 13,045 | 27.57 | ||||||||||||
December 31, 2003 | 13,045 | 27.57 | 13,045 | 27.57 | ||||||||||||
Granted | 62,350 | 25.59 | 84,350 | 26.94 | ||||||||||||
Vested | (2,509 | ) | 27.56 | (2,609 | ) | 27.57 | ||||||||||
Cancelled | (1,000 | ) | 25.66 | (4,900 | ) | 26.08 | ||||||||||
September 30, 2004 | 71,886 | $ | 25.88 | |||||||||||||
December 31, 2004 | 89,886 | 27.06 | ||||||||||||||
Vested | (1,000 | ) | 24.40 | |||||||||||||
Cancelled | (2,550 | ) | 26.83 | |||||||||||||
March 31, 2005 | 86,336 | $ | 27.10 | |||||||||||||
7.8. Earnings per Share:
Basic earnings per share (“EPS”) are computed by dividing income available to common shareholders by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of stock warrants, stock options and restricted stock awards. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the three and nine months ended September 30, 2004March 31, 2005 and 2003: For the three months ended September 30, 2004 2003 Weighted Average Weighted Average Net Income Common Shares EPS Net Income Common Shares EPS Basic EPS $ 6,974,765 15,341,801 $ 0.45 $ 5,529,193 15,148,978 $ 0.36 Dilutive effect of stock warrants, options and restricted stock awards 489,859 601,669 Diluted EPS $ 6,974,765 15,831,660 $ 0.44 $ 5,529,193 15,750,647 $ 0.35
For the nine months ended September 30, | ||||||||||||||||||||||||
2004 | 2003 | |||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||
Net Income | Common Shares | EPS | Net Income | Common Shares | EPS | |||||||||||||||||||
Basic EPS | $ | 19,736,097 | 15,322,675 | $ | 1.29 | $ | 15,272,214 | 14,311,587 | $ | 1.07 | ||||||||||||||
Dilutive effect of stock warrants, options and restricted stock awards | 471,260 | 1,385,575 | ||||||||||||||||||||||
Diluted EPS | $ | 19,736,097 | 15,793,935 | $ | 1.25 | $ | 15,272,214 | 15,697,162 | $ | 0.97 | ||||||||||||||
For the three months ended March 31, | ||||||||||||||||||||||||
2005 | 2004 | |||||||||||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||||||||||
Net Income | Common Shares | EPS | Net Income | Common Shares | EPS | |||||||||||||||||||
Basic EPS | $ | 8,919,832 | 15,531,779 | $ | 0.57 | $ | 6,011,108 | 15,303,886 | $ | 0.39 | ||||||||||||||
Dilutive effect of stock warrants, options and restricted stock awards | 620,383 | 470,601 | ||||||||||||||||||||||
Diluted EPS | $ | 8,919,832 | 16,152,162 | $ | 0.55 | $ | 6,011,108 | 15,774,487 | $ | 0.38 | ||||||||||||||
As of September 30,March 31, 2005 and 2004, and 2003, there were 75,0000 and 55,00075,000 antidilutive options outstanding, respectively.
8.14
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. Commitments and Contingencies:
Employment Agreements:
The Company has employment agreements with all of its executive officers and with several members of its senior management group, the terms of which expire on March 31, 2005, December 31, 2005, 2006, or 2007. Such agreements provide for base salary payments as well as bonuses which arebonus entitlement, based on the attainment of specific managementpersonal and Company goals. Estimated future compensation under these agreements is approximately $4,539,440.$3,111,268. The agreements also contain confidentiality and non-compete provisions. This amount also includes agreements signed on October 1, 2004 by the management of IGS Nevada.
Leases:
The Company is party to various operating and capital leases with respect to its facilities and equipment. Please refer to the Company’s consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission for discussion of these leases.
Litigation:
The Company is from time to time subject to routine litigation incidental to its business. The Company believes that the results of any pending legal proceedings will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
12
PORTFOLIO RECOVERY ASSOCIATES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
9. Subsequent Event:
On October 1, 2004, the Company acquired the assets of IGS Nevada, Inc., a privately held company specializing in asset-location and debt resolution services. The transaction was completed at a price of $14 million, consisting of $12 million in cash and $2 million in PRA Inc common stock. The total purchase price could increase by $4 million, through contingent cash payments of $2 million each in 2005 and 2006, based upon the performance of PRA Location Services, LLC d/b/a IGS Nevada (“IGS Nevada”) during each of those two years. The business will operate under the name of PRA Location Services, LLC d/b/a IGS Nevada. IGS Nevada, Inc.’s founder and his top management team have signed long-term employment agreements and will continue to manage IGS Nevada. The Company secured a consent from its revolving line of credit holder related to this acquisition.
The common stock component of the purchase price resulted in the issuance of 69,914 shares of unregistered stock to the sole selling stockholder. The share count was determined by using a formula agreed to by both parties and contained within the asset purchase agreement. In addition, on October 1, 2004, 17,000 restricted stock shares were awarded to certain employees of IGS Nevada.
The Company obtained an independent valuation of the assets purchased. This valuation has determined that of the $14 million purchase price, $5.0 million is related to customer relationships, $1.8 million is related to non-compete agreements, $1.0 million is tangible net worth, with the remaining $6.2 million allocated to goodwill. The Company has accounted for the acquisition in accordance with FAS141, “Business Combinations” and will apply the provisions of FAS142, “Goodwill and Other Intangible Assets” to the acquired intangible assets.
10. Recent Accounting Pronouncements:
In October 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” This SOP proposes guidance on accounting for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP is effective for loans acquired in fiscal years beginning afterOn December 15, 2004. The SOP would limit the revenue that may be accrued to the excess of the estimate of expected future cash flows over a portfolio’s initial cost of accounts receivable acquired. The SOP would require that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue, expense, or on the balance sheet. The SOP would freeze the internal rate of return, referred to as IRR, originally estimated when the accounts receivable are purchased for subsequent impairment testing. Rather than lower the estimated IRR if the original collection estimates are not received, the carrying value of a portfolio would be written down to maintain the original IRR. Increases in expected future cash flows would be recognized prospectively through adjustment of the IRR over a portfolio’s remaining life. The SOP provides that previously issued annual financial statements would not need to be restated. Historically, as the Company has applied the guidance of Practice Bulletin 6, the Company has moved yields both upward and downward as appropriate under that guidance. However, since the new SOP guidance does not permit yields to be lowered, it will increase the probability of impairment charges going forward.
13
PORTFOLIO RECOVERY ASSOCIATES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
In March16, 2004, the Financial Accounting Standards Board (“FASB”) issued an Exposure Draft,FASB statement No. 123®, “Share-Based Payment, an amendment of” (“FAS 123R”). FAS 123R revises FASB Statements No. 123 and 95.” This proposed Statement would neither change the accounting in FASB Statementstatement No. 123, “Accounting for Stock-Based Compensation,Compensation” (“FAS 123”) and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. In addition to revising FAS 123, FAS 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and amends FASB Statement No. 95, “Statement of Cash Flows.” forFAS 123R applies to all stock-based compensation transactions in which an enterprise exchangesa company acquires services by (1) issuing its stock or other equity instruments, for services of parties other than employees nor change the accounting for stock ownershipexcept through arrangements resulting from employee stock-ownership plans which(ESOPs) or (2) incurring liabilities that are subject to AICPA Statement of Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans.” The Board intends to reconsider the accounting for those transactions and plan in a later phase of its project on equity-based compensation. In this proposed Statement, the Board believes that employee services received in exchange for equity instruments give rise to recognizable compensation cost as the services are used in the issuing entity’s operations. In addition, the proposed Statement would require that public companies measure the compensation cost related to employee services received in exchange for equity instruments issued based on the grant-date fair value of those instruments. The Board will also consider other items such as streamlining volatility assumptions and addressing the fair value measurement models. On October 13, 2004, the FASB delayed thecompany’s stock price. FAS 123R is effective date tofor annual periods beginningthat begin after June 15, 2005, rather then2005; however, early adoption is encouraged. The Company believes that all of its existing stock-based awards are equity instruments. The Company previously adopted FAS 123 on January 1, 2005 as originally proposed. In addition,2002 and has been expensing equity based compensation since that time. Management believes the FASB recently decided to include in the proposed statement two transition methods: one that provides for prospective treatment and one that provides for retrospective application. The FASB is expected to issue its final standard before December 31, 2004. Management will continue to assess the potential impact this statementadoption of FAS 123R will have no material impact on the Company; however, the Company has adopted SFAS 123 and currently expenses all equity-based compensation in the current period.its financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause theour results of the Company to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:
• | our ability to purchase defaulted consumer receivables at appropriate prices; | |||
• | changes in the business practices of credit originators in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies; | |||
• | changes in government regulations that affect our ability to collect sufficient amounts on our acquired or serviced receivables; | |||
• | our ability to employ and retain qualified employees, especially collection personnel; | |||
• | changes in the credit or capital markets, which affect our ability to borrow money or raise capital to purchase or service defaulted consumer receivables; | |||
• | the degree and nature of our competition; | |||
• | our future ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder; | |||
• | our ability to successfully integrate IGS into our business operations; | |||
• | the sufficiency of our funds generated from operations, existing cash and available borrowings to finance our current operations; and | |||
• | the risk factors listed from time to time in our filings with the Securities and Exchange Commission. |
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Results of Operations
The following table sets forth certain operating data as a percentage of total revenue for the periods indicated:
For the Three Months | For the Nine Months | For the Three Months | ||||||||||||||||||||||
Ended September 30, | Ended September 30, | Ended March 31, | ||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Income recognized on finance receivables | 95.7 | % | 96.5 | % | 95.3 | % | 96.3 | % | 90.1 | % | 94.6 | % | ||||||||||||
Commissions | 4.3 | % | 3.5 | % | 4.7 | % | 3.7 | % | 9.9 | % | 5.4 | % | ||||||||||||
Total revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Compensation and employee services | 32.4 | % | 33.2 | % | 32.9 | % | 34.6 | % | 30.4 | % | 33.8 | % | ||||||||||||
Outside legal and other fees and services | 18.9 | % | 17.5 | % | 18.4 | % | 16.1 | % | 20.0 | % | 16.8 | % | ||||||||||||
Communications | 3.0 | % | 3.2 | % | 3.3 | % | 3.2 | % | 3.0 | % | 4.0 | % | ||||||||||||
Rent and occupancy | 1.5 | % | 1.5 | % | 1.6 | % | 1.4 | % | 1.3 | % | 1.7 | % | ||||||||||||
Other operating expenses | 2.3 | % | 1.8 | % | 2.5 | % | 2.2 | % | 2.1 | % | 2.7 | % | ||||||||||||
Depreciation | 1.7 | % | 1.7 | % | 1.7 | % | 1.7 | % | ||||||||||||||||
Depreciation and amortization | 2.6 | % | 1.8 | % | ||||||||||||||||||||
Total operating expenses | 59.8 | % | 58.9 | % | 60.4 | % | 59.2 | % | 59.4 | % | 60.8 | % | ||||||||||||
Income from operations | 40.2 | % | 41.1 | % | 39.6 | % | 40.8 | % | 40.6 | % | 39.2 | % | ||||||||||||
Other income and (expense): | ||||||||||||||||||||||||
Interest income | 0.3 | % | 0.0 | % | 0.1 | % | 0.0 | % | 0.3 | % | 0.0 | % | ||||||||||||
Interest expense | -0.2 | % | -0.4 | % | -0.3 | % | -0.4 | % | (-0.2 | %) | (-0.3 | %) | ||||||||||||
Income before income taxes | 40.3 | % | 40.7 | % | 39.4 | % | 40.4 | % | 40.7 | % | 38.9 | % | ||||||||||||
Provision for income taxes | 15.6 | % | 15.8 | % | 15.3 | % | 15.7 | % | 15.8 | % | 15.2 | % | ||||||||||||
Net income | 24.7 | % | 24.9 | % | 24.1 | % | 24.7 | % | 24.9 | % | 23.7 | % | ||||||||||||
The Company usesWe use the following terminology throughout itsour reports. “Cash Receipts” refers to all collections of cash, regardless of the source. “Cash Collections” refers to collections on the Company’sour owned portfolios only, exclusive of commission income and sales of finance receivables. “Cash Sales of Finance Receivables” refers to the sales of the Company’sour owned portfolios. “Commissions” refers to fee income generated from the Company’sour wholly-owned contingent fee subsidiary.and fee-for-service subsidiaries.
Three Months Ended September 30, 2004March 31, 2005 Compared To Three Months Ended September 30, 2003March 31, 2004
Revenue
Total revenue was $28.3$35.8 million for the three months ended September 30, 2004,March 31, 2005, an increase of $6.1$10.5 million or 27.5%41.5% compared to total revenue of $22.2$25.3 million for the three months ended September 30, 2003.March 31, 2004.
Income Recognized on Finance Receivables
Income recognized on finance receivables was $27.1$32.2 million for the three months ended September 30, 2004,March 31, 2005, an increase of $5.7$8.3 million or 26.6%34.7% compared to income recognized on finance receivables of $21.4$23.9 million for the three months ended September 30, 2003.March 31, 2004. The majority of the increase was due to an increase in the Company’sour cash collections on itsour owned defaulted consumer receivables to $38.8$47.8 million from $30.2$35.5 million, an increase of 28.5%34.7%. The Company’sOur amortization rate on owned portfolio for the three months ended September 30, 2004March 31, 2005 was 30.3%32.6% while for the three months ended September 30, 2003March 31, 2004 it was 29.2%32.7%. During the three months ended September 30, 2004, the CompanyMarch 31, 2005, we acquired defaulted
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consumer receivables portfolios with an aggregate face value amount of $564.9$659.9 million at a cost of $10.8$17.8 million. During the three months ended September 30, 2003, the CompanyMarch 31, 2004, we acquired defaulted consumer receivable portfolios with an aggregate face value of $323.4$613.1 million at a cost of $11.8$15.0 million. The Company’sOur relative cost basis of acquiring defaulted consumer receivable portfolios decreasedincreased from 3.65%2.46% of face value for the three months ended September 30, 2003March 31, 2004 to 1.91%2.69% of face value for the three months ended September 30, 2004.March 31, 2005. In any period, the Company acquireswe acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectibility. The CompanyWe may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on the Company’sour particular buying activity in that period. During the three months ended September 30, 2004, the CompanyMarch 31, 2005, we bought a slightly higher concentration of older, lowernewer, higher priced portfolios which resulted in a lowerhigher purchase price when compared to the three months ended September 30, 2003.March 31, 2004. However, regardless of the average purchase price, the Company intendswe intend to target a similar internal rate of return in pricing itsour portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to estimated profitability of a period’s buying.
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Commissions
Commissions were $1.2$3.5 million for the three months ended September 30, 2004,March 31, 2005, an increase of $416,000$2.1 million or 53.1%150.0% compared to commissions of $784,000$1.4 million for the three months ended September 30, 2003.March 31, 2004. Commissions increased as a result of increased liquidation rates on itsa growing inventory due to an improved client mix.of higher quality accounts from our Anchor contingent fee business as well as the addition of our IGS fee-for-service business.
Operating Expenses
Total operating expenses were $16.9$21.2 million for the three months ended September 30, 2004,March 31, 2005, an increase of $3.8$5.8 million or 29.0%37.7% compared to total operating expenses of $13.1$15.4 million for the three months ended September 30, 2003.March 31, 2004. Total operating expenses, including compensation and employee services expenses, were 42.2%41.4% of cash receipts excluding sales for the three months ended September 30, 2004March 31, 2005 compared to 42.1%41.6% for the same period in 2003.2004.
Compensation and Employee Services
Compensation and employee services expenses were $9.2$10.9 million for the three months ended September 30, 2004,March 31, 2005, an increase of $1.8$2.4 million or 24.3%28.2% compared to compensation and employee services expenses of $7.4$8.5 million for the three months ended September 30, 2003.March 31, 2004. Compensation and employee services expenses increased as total employees grew to 891978 at September 30, 2004March 31, 2005 from 747814 at September 30, 2003.March 31, 2004. Compensation and employee services expenses as a percentage of cash receipts excluding sales decreased to 22.8%21.1% for the three months ended September 30, 2004March 31, 2005 from 23.6%23.1% of cash receipts excluding sales for the same period in 20032004 as a result of increased collector productivity.
Outside Legal and Other Fees and Services
Outside legal and other fees and services expenses were $5.3$7.2 million for the three months ended September 30, 2004,March 31, 2005, an increase of $1.4$3.0 million or 35.9%71.4% compared to outside legal and other fees and services expenses of $3.9$4.2 million for the three months ended September 30, 2003.March 31, 2004. Approximately $1.4$1.5 million of the increase was attributable to the increased cash collections resulting from the increased number of accounts referred to independent contingent fee attorneys. This increase is consistent with the growth the Companywe experienced in itsour portfolio of defaulted consumer receivables and a portfolio management strategy shift implemented in mid 2002.mid-2002. This strategy resulted in the Companyus referring to the legal suit process more previously unsuccessfully liquidated accounts that have an identified means of repayment but that are nearing their legal statute of limitations, than had been referred historically. Legal cash collections represented 29.7%27.4% of total cash collectionsreceipts for the three months ended September 30, 2004March 31, 2005 compared to 24.8%26.3% for the three months ended September 30, 2003.March 31, 2004. Total legal expenses for the three months ended September 30, 2004March 31, 2005 were 36.8%34.4% of legal cash collections compared to 38.9%34.5% for the three months ended September 30, 2003.March 31, 2004. Legal fees and costs increased from $3.0$3.3 million for the three months ended September 30, 2003March 31, 2004 to $4.4$4.8 million, or an increase of 46.7%45.5%, for the three months ended September 30, 2004.March 31, 2005. Of the remaining $1.5 million increase, $1.0 million was from agency fees mainly incurred by our IGS subsidiary and $500,000 was from increased other fees and services.
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Communications
Communications expenses were $840,000$1.1 million for the three months ended September 30, 2004,March 31, 2005, an increase of $137,000$100,000 or 19.5%10.0% compared to communications expenses of $703,000$1.0 million for the three months ended September 30, 2003.March 31, 2004. The increase was attributable to growth in mailings and higher telephone expenses incurred to collect on a greater number of defaulted consumer receivables owned and serviced. MailingsTelephone expenses were responsible for 62.8%80.7% of this increase, while the remaining 37.2%19.3% was attributable to higher telephonemailing expenses.
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Rent and Occupancy
Rent and occupancy expenses were $435,000$476,000 for the three months ended September 30, 2004,March 31, 2005, an increase of $118,000$47,000 or 37.2%11.0% compared to rent and occupancy expenses of $317,000$429,000 for the three months ended September 30, 2003. The increase was attributable to increased leased space at the Company’sMarch 31, 2004. Our new Norfolk, VA location whichIGS facility accounted for $110,000$24,000 of the increase. Theincrease while the remaining increase was attributable to rent escalations at our Norfolk locations as well as increased utility charges resulting from the increased space in Norfolk.generally.
Other Operating Expenses
Other operating expenses were $649,000$753,000 for the three months ended September 30, 2004,March 31, 2005, an increase of $256,000$62,000 or 65.1%9.0% compared to other operating expenses of $393,000$691,000 for the three months ended September 30, 2003.March 31, 2004. The increase was due to changes in insurance expenses, taxes, fees and licenses, repairs and maintenance, travel expenses and miscellaneous expenses. Insurance expenses increased by $149,000, taxes,Taxes, fees and licenses increased by $140,000,$93,000 and insurance increased by $36,000. These were offset by a decrease in repairs and maintenance of $18,000, a decrease in travel expenses of $21,000 and a decrease in miscellaneous expenses decreased by $33,000.of $28,000.
Depreciation and Amortization
Depreciation and amortization expenses were $488,000$941,000 for the three months ended September 30, 2004,March 31, 2005, an increase of $105,000$493,000 or 27.4%110.0% compared to depreciation expenses of $383,000$448,000 for the three months ended September 30, 2003.March 31, 2004. The increase was attributable to the depreciation and amortization of the acquired assets of IGS and the continued capital expenditures on equipment, software and computers related to the Company’sour growth and systems upgrades. The amortization of the IGS intangible assets accounted for $445,000 of the increase while the remaining increase of $48,000 resulted from continued capital expenditures on equipment, software and computers.
Interest Income
Interest income was $77,000$96,000 for the three months ended September 30, 2004,March 31, 2005, an increase of $76,000$92,000 compared to interest income of $1,000$4,000 for the three months ended September 30, 2003.March 31, 2004. This increase is the result of an increase in the average invested amountinvestment in auction rate certificates from $0 forand tax exempt money market accounts during the three months ended September 30, 2003 to $21.0 million for the three months ended September 30, 2004.March 31, 2005.
Interest Expense
Interest expense was $64,000 for the three months ended March 31, 2005, a decrease of $5,000 or 7.3% compared to interest expense of $69,000 for the three months ended September 30, 2004, a decrease of $15,000 or 17.9% compared to interest expense of $84,000 for the three months ended September 30, 2003.March 31, 2004. The decrease is due to a lower unused line fee under the new revolving credit arrangement.
Nine Months Ended September 30, 2004 Compared To Nine Months Ended September 30, 2003
Revenue
Total revenue was $81.7 million for the nine months ended September 30, 2004, an increase of $19.8 million or 32.0% compared to total revenue of $61.9 million for the nine months ended September 30, 2003.
Income Recognized on Finance Receivables
Income recognized on finance receivables was $77.9 million for the nine months ended September 30, 2004, an increase of $18.3 million or 30.7% compared to income recognized on finance receivables of $59.6 million for the nine months ended September 30, 2003. The majority of the increase was due to an increase in the Company’s cash collections on its owned defaulted consumer receivables to $112.8 million from $86.2 million, an increase of 30.9%. The Company’s amortization rate on owned portfolio for the nine months ended September 30, 2004 was 30.9% while for the nine months ended September 30, 2003 it was 30.8%. During the nine months ended September 30, 2004, the Company acquired defaulted consumer receivables portfolios with an aggregate face value amount of $2.67 billion at a cost of $38.7 million. During the nine months ended September 30, 2003, the Company acquired defaulted consumer receivable portfolios with an aggregate face value of $1.85 billion at a cost of $50.3 million.
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The Company’s relative cost basis of acquiring defaulted consumer receivable portfolios decreased from 2.71% of face value for the nine months ended September 30, 2003 to 1.45% of face value for the nine months ended September 30, 2004. In any period, the Company acquires defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectibility. The Company may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on the Company’s particular buying activity in that period. During the nine months ended September 30, 2004, the Company bought a higher concentration of older, lower priced portfolios which resulted in a lower purchase price when compared to the nine months ended September 30, 2003. However, regardless of the average purchase price, the Company intends to target a similar internal rate of return in pricing its portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to estimated profitability of a period’s buying.
Commissions
Commissions were $3.8 million for the nine months ended September 30, 2004, an increase of $1.5 million or 65.2% compared to commissions of $2.3 million for the nine months ended September 30, 2003. Commissions increased as a result of a growing inventory of accounts.
Operating Expenses
Total operating expenses were $49.3 million for the nine months ended September 30, 2004, an increase of $12.6 million or 34.3% compared to total operating expenses of $36.7 million for the nine months ended September 30, 2003. Total operating expenses, including compensation and employee services expenses, were 42.3% of cash receipts excluding sales for the nine months ended September 30, 2004 compared to 41.5% for the same period in 2003.
Compensation and Employee Services
Compensation and employee services expenses were $26.9 million for the nine months ended September 30, 2004, an increase of $5.5 million or 25.7% compared to compensation and employee services expenses of $21.4 million for the nine months ended September 30, 2003. Compensation and employee services expenses increased as total employees grew to 891 at September 30, 2004 from 747 at September 30, 2003. Compensation and employee services expenses as a percentage of cash receipts excluding sales decreased to 23.0% for the nine months ended September 30, 2004 from 24.2% of cash receipts excluding sales for the same period in 2003.
Outside Legal and Other Fees and Services
Outside legal and other fees and services expenses were $15.0 million for the nine months ended September 30, 2004, an increase of $5.0 million or 50.0% compared to outside legal and other fees and services expenses of $10.0 million for the nine months ended September 30, 2003. Approximately $3.9 million of the increase was attributable to the increased cash collections resulting from the increased number of accounts referred to independent contingent fee attorneys. This increase is consistent with the growth the Company experienced in its portfolio of defaulted consumer receivables and a portfolio management strategy shift implemented in mid-2002. This strategy resulted in the Company referring to the legal suit process previously unsuccessfully liquidated accounts that have an identified means of repayment but that are nearing their legal statute of limitations. Legal cash collections represented 28.3% of total cash collections for the nine months ended September 30, 2004 compared to 24.7% for the nine months ended September 30, 2003. Total legal expenses for the nine months ended September 30, 2004 were 34.8% of legal cash collections compared to 35.7% for the nine months ended September 30, 2003. Legal fees and costs increased from $7.6 million for the nine months ended September 30, 2003 to $11.5 million, or an increase of 51.3%, for the nine months ended September 30, 2004. In addition, $531,000 was expensed during the nine months ended September 30, 2004 related to the capitalization of fees paid to third parties for address correction and other customer data associated with the acquisition of portfolios purchased over the past 5 years. As a result of a review of the company’s accounting, the company determined these capitalized acquisition fees should be expensed.
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Communications
Communications expenses were $2.7 million for the nine months ended September 30, 2004, an increase of $700,000 or 35.0% compared to communications expenses of $2.0 million for the nine months ended September 30, 2003. The increase was attributable to growth in mailings and higher telephone expenses incurred to collect on a greater number of defaulted consumer receivables owned and serviced. Mailings were responsible for 83.1% of this increase, while the remaining 16.9% was attributable to higher telephone expenses.
Rent and Occupancy
Rent and occupancy expenses were $1.3 million for the nine months ended September 30, 2004, an increase of $430,000 or 49.4% compared to rent and occupancy expenses of $870,000 for the nine months ended September 30, 2003. The increase was attributable to increased leased space due to the opening of a call center in Hampton, Virginia in March 2003 and at the Company’s new Norfolk, VA location which opened in January 2004. The new Hampton call center accounted for $59,000 of the increase and the new Norfolk location accounted for $329,000 of the increase. The remaining increase was attributable to increased utility charges resulting from the increased space in Norfolk and Hampton.
Other Operating Expenses
Other operating expenses were $2.0 million for the nine months ended September 30, 2004, an increase of $700,000 or 53.8% compared to other operating expenses of $1.3 million for the nine months ended September 30, 2003. The increase was due to changes in taxes, fees and licenses, repairs and maintenance, insurance and miscellaneous expenses. Taxes, fees and licenses increased by $160,000, repairs and maintenance expenses increased by $79,000, insurance expenses increased by $405,000 and miscellaneous expenses increased by $56,000.
Depreciation
Depreciation expenses were $1.4 million for the nine months ended September 30, 2004, an increase of $300,000 or 27.3% compared to depreciation expenses of $1.1 million for the nine months ended September 30, 2003. The increase was attributable to continued capital expenditures on equipment, software and computers related to the Company’s growth and systems upgrades.
Interest Income
Interest income was $106,000 for the nine months ended September 30, 2004, an increase of $77,000 compared to interest income of $29,000 for the nine months ended September 30, 2003. These amounts are the result of investing in tax-exempt auction rate certificates in 2004 and 2003.
Interest Expense
Interest expense was $206,000 for the nine months ended September 30, 2004, a decrease of $37,000 or 15.2% compared to interest expense of $243,000 for the nine months ended September 30, 2003. The decrease is due to a lower unused line fee under the new revolving credit arrangement.
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Supplemental Performance Data
Owned Portfolio Performance:
The following table shows the Company’sour portfolio buying activity by year, setting forth, among other things, the purchase price, actual cash collections and estimated remaining cash collections as of September 30, 2004.March 31, 2005.
($ in thousands)
Estimated | Total | Total Estimated | Actual Cash | Total Estimated | ||||||||||||||||||||||||||||||||||||||||
Actual Cash Collections | Remaining | Estimated | Collections to | Collections | Estimated | Total Estimated | Collections to | |||||||||||||||||||||||||||||||||||||
Purchase Period | Purchase Price(1) | Including Cash Sales | Collections(2) | Collections(3) | Purchase Price(4) | |||||||||||||||||||||||||||||||||||||||
Purchase | Purchase | Including Cash | Remaining | Total Estimated | Collections to | Purchase Price | ||||||||||||||||||||||||||||||||||||||
Period | Price(1) | Sales | Collections(2) | Collections(3) | Purchase Price(4) | Adjusted(5) | ||||||||||||||||||||||||||||||||||||||
1996 | $ | 3,080 | $ | 9,192 | $ | 118 | $ | 9,309 | 302 | % | $ | 3,080 | $ | 9,310 | $ | 85 | $ | 9,395 | 305 | % | 305 | % | ||||||||||||||||||||||
1997 | $ | 7,685 | $ | 22,198 | $ | 311 | $ | 22,509 | 293 | % | $ | 7,685 | $ | 22,638 | $ | 382 | $ | 23,020 | 300 | % | 300 | % | ||||||||||||||||||||||
1998 | $ | 11,089 | $ | 30,684 | $ | 746 | $ | 31,430 | 283 | % | $ | 11,089 | $ | 31,615 | $ | 802 | $ | 32,418 | 292 | % | 292 | % | ||||||||||||||||||||||
1999 | $ | 18,899 | $ | 52,273 | $ | 3,796 | $ | 56,069 | 297 | % | $ | 18,898 | $ | 54,849 | $ | 3,462 | $ | 58,311 | 309 | % | 309 | % | ||||||||||||||||||||||
2000 | $ | 25,015 | $ | 73,778 | $ | 11,536 | $ | 85,315 | 341 | % | $ | 25,015 | $ | 80,229 | $ | 10,793 | $ | 91,022 | 364 | % | 364 | % | ||||||||||||||||||||||
2001 | $ | 33,473 | $ | 95,588 | $ | 28,521 | $ | 124,109 | 371 | % | $ | 33,471 | $ | 108,458 | $ | 25,372 | $ | 133,830 | 400 | % | 400 | % | ||||||||||||||||||||||
2002 | $ | 42,284 | $ | 78,399 | $ | 57,230 | $ | 135,629 | 321 | % | $ | 42,281 | $ | 96,064 | $ | 47,145 | $ | 143,209 | 339 | % | 339 | % | ||||||||||||||||||||||
2003 | $ | 61,529 | $ | 61,574 | $ | 98,708 | $ | 160,282 | 261 | % | $ | 61,494 | $ | 87,968 | $ | 86,053 | $ | 174,021 | 283 | % | 283 | % | ||||||||||||||||||||||
2004 | $ | 39,206 | $ | 10,289 | $ | 85,770 | $ | 96,059 | 245 | % | $ | 61,311 | $ | 30,454 | $ | 109,781 | $ | 140,236 | 229 | % | 240 | % | ||||||||||||||||||||||
2005 YTD | $ | 17,822 | $ | 873 | $ | 29,980 | $ | 30,853 | 173 | % | 229 | % |
(1) | Purchase price refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant accounts (also defined as buybacks). Non-compliant refers to the contractual representations and warranties provided for in the purchase and sale contract between the seller and |
(2) | Estimated remaining collections refers to the sum of all future projected cash collections on our owned portfolios. |
(3) | Total estimated collections refers to the actual cash collections, including cash sales, plus estimated remaining collections. |
(4) | Total estimated collections to purchase price refers to the total estimated collections divided by the purchase price. | |
(5) | Total estimated collections to purchase price adjusted refers to the total estimated collections divided by the purchase price after removing the impact of purchased bankrupt accounts as well as other purchased accounts that had established some level of payment stream after charge-off (we refer to these as “paying” or “semi-performing” accounts). |
When the Company acquires a portfolio of defaulted accounts, it generally does so with a forecast of future total estimated collections to purchase price paid of no more than 2.6 times. Only after the portfolio has established probable and estimable performance in excess of that projection will estimated remaining collections be increased. If actual cash collections are less than the original forecast, the Company moves aggressively to lower estimated remaining collections to appropriate levels.
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The following graph shows the Company’s purchase price in itsof our owned portfolios by year beginning in 1996 and includes the year to date acquisition amount as of September 30,for the quarters ended March 31, 2005 and 2004. ThisThe purchase price number represents the cash paid to the seller to acquire defaulted consumer receivables, plus certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant accounts.
The Company utilizesWe utilize a long-term approach to collecting itsour owned pools of receivables. This approach has historically caused the Companyus to realize significant cash collections and revenues from purchased pools of finance receivables years after they are originally acquired. As a result, the Company haswe have in the past been able to reduce itsour level of current period acquisitions without a corresponding negative current period impact on cash collections and revenue.
The following table, which excludes any proceeds from cash sales of finance receivables, demonstrates the Company’sour ability to realize significant multi-year cash collection streams on itsour owned pools as of September 30, 2004:pools:
($ in thousands)
Cash Collections By Year, By Year of Purchase
($ in thousands)
Purchase | Purchase | Cash Collection Period | Purchase | Cash Collection Period | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Period | Price | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | Total | Price | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 YTD | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1996 | $ | 3,080 | $ | 548 | $ | 2,484 | $ | 1,890 | $ | 1,348 | $ | 1,025 | $ | 730 | $ | 496 | $ | 398 | $ | 212 | $ | 9,131 | $ | 3,080 | $ | 548 | $ | 2,484 | $ | 1,890 | $ | 1,348 | $ | 1,025 | $ | 730 | $ | 496 | $ | 398 | $ | 285 | $ | 45 | $ | 9,249 | |||||||||||||||||||||||||||||||||||||||||||||||
1997 | 7,685 | — | 2,507 | 5,215 | 4,069 | 3,347 | 2,630 | 1,829 | 1,324 | 799 | $ | 21,720 | 7,685 | — | 2,507 | 5,215 | 4,069 | 3,347 | 2,630 | 1,829 | 1,324 | 1,022 | 216 | $ | 22,159 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1998 | 11,089 | — | — | 3,776 | 6,807 | 6,398 | 5,152 | 3,948 | 2,797 | 1,750 | $ | 30,628 | 11,089 | — | — | 3,776 | 6,807 | 6,398 | 5,152 | 3,948 | 2,797 | 2,200 | 483 | $ | 31,561 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1999 | 18,899 | — | — | — | 5,138 | 13,069 | 12,090 | 9,598 | 7,336 | 4,350 | $ | 51,581 | 18,898 | — | — | — | 5,138 | 13,069 | 12,090 | 9,598 | 7,336 | 5,615 | 1,310 | $ | 54,156 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2000 | 25,015 | — | — | — | — | 6,894 | 19,498 | 19,478 | 16,628 | 10,814 | $ | 73,312 | 25,015 | — | — | — | — | 6,894 | 19,498 | 19,478 | 16,628 | 14,098 | 3,171 | $ | 79,767 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2001 | 33,473 | — | — | — | — | — | 13,048 | 28,831 | 28,003 | 20,215 | $ | 90,097 | 33,471 | — | — | — | — | — | 13,048 | 28,831 | 28,003 | 26,717 | 6,368 | $ | 102,967 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2002 | 42,284 | — | — | — | — | — | — | 15,073 | 36,258 | 27,057 | $ | 78,388 | 42,281 | — | — | — | — | — | — | 15,073 | 36,258 | 35,742 | 8,980 | $ | 96,053 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2003 | 61,529 | — | — | — | — | — | — | — | 24,308 | 37,266 | $ | 61,574 | 61,494 | — | — | — | — | — | — | — | 24,308 | 49,706 | 13,954 | $ | 87,968 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2004 | 39,206 | — | — | — | — | — | — | — | — | 10,289 | $ | 10,289 | 61,311 | — | — | — | — | — | — | — | — | 18,019 | 12,430 | $ | 30,449 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2005 YTD | 17,822 | — | — | — | — | — | — | — | — | — | 873 | $ | 873 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 242,260 | $ | 548 | $ | 4,991 | $ | 10,881 | $ | 17,362 | $ | 30,733 | $ | 53,148 | $ | 79,253 | $ | 117,052 | $ | 112,752 | $ | 426,720 | $ | 282,146 | $ | 548 | $ | 4,991 | $ | 10,881 | $ | 17,362 | $ | 30,733 | $ | 53,148 | $ | 79,253 | $ | 117,052 | $ | 153,404 | $ | 47,830 | $ | 515,202 | |||||||||||||||||||||||||||||||||||||||||||||||
2221
When the Company acquireswe acquire a new pool of finance receivables, our estimates typically result in a 60 -72 — 84 month projection of cash collections is created.collections. The following chart shows the Company’sour historical cash collections (including cash sales of finance receivables) in relation to the aggregate of the total estimated collection projections made at the time of each respective pool purchase, adjusted for buybacks.
23
Owned Portfolio Personnel Performance:
The Company measuresWe measure the productivity of each collector each month, breaking results into groups of similarly tenured collectors. The following three tables display various productivity measures tracked by the Company.that we track.
Collector by Tenure
Collector FTE at: | 12/31/00 | 12/31/01 | 12/31/02 | 12/31/03 | 09/30/03 | 09/30/04 | 12/31/01 | 12/31/02 | 12/31/03 | 12/31/04 | 03/31/04 | 03/31/05 | ||||||||||||||||||||||||
One year +1 | 109 | 151 | 210 | 241 | 233 | 300 | 151 | 210 | 241 | 298 | 274 | 319 | ||||||||||||||||||||||||
Less than one year2 | 180 | 218 | 223 | 338 | 301 | 342 | 218 | 223 | 338 | 349 | 294 | 345 | ||||||||||||||||||||||||
Total2 | 289 | 369 | 433 | 579 | 534 | 642 | 369 | 433 | 579 | 647 | 568 | 664 |
1 Calculated based on actual employees (collectors) with one year of service or more.
1 Calculated based on actual employees (collectors) with one year of service or more. |
2 Calculated using total hours worked by all collectors, including those in training to produce a full time equivalent “FTE”. |
Monthly Cash Collections by Tenure1
Average performance YTD | 12/31/00 | 12/31/01 | 12/31/02 | 12/31/03 | 09/30/03 | 09/30/04 | ||||||||||||||||||
One year +2 | $ | 14,081 | $ | 15,205 | $ | 16,927 | $ | 18,158 | $ | 18,425 | $ | 17,497 | ||||||||||||
Less than one year3 | $ | 7,482 | $ | 7,740 | $ | 8,689 | $ | 8,303 | $ | 8,494 | $ | 9,740 |
Average performance YTD | 12/31/01 | 12/31/02 | 12/31/03 | 12/31/04 | 03/31/04 | 03/31/05 | ||||||
One year +2 | $15,205 | $16,927 | $18,158 | $17,129 | $18,322 | $17,846 | ||||||
Less than one year3 | $ 7,740 | $ 8,689 | $ 8,303 | $ 9,363 | $ 9,815 | $ 9,363 |
1 Cash collection numbers include only accounts assigned to collectors. Significant cash collections do occur on “unassigned” accounts.
2 Calculated using average YTD monthly cash collections of all collectors with one year or more of tenure.
1 Cash collection numbers include only accounts assigned to collectors. Significant cash collections do occur on “unassigned” accounts. |
2 Calculated using average YTD monthly cash collections of all collectors with one year or more of tenure. |
3 Calculated using weighted average YTD monthly cash collections of all collectors with less than one year of tenure, including those in training. |
YTD Cash Collections per Hour Paid1
Average performance YTD | 12/31/00 | 12/31/01 | 12/31/02 | 12/31/03 | 09/30/03 | 09/30/04 | ||||||||||||||||||
Total cash collections | $ | 64.37 | $ | 77.20 | $ | 96.37 | $ | 108.27 | $ | 110.77 | $ | 117.85 | ||||||||||||
Non-legal cash collections | $ | 53.31 | $ | 66.87 | $ | 77.72 | $ | 80.10 | $ | 83.36 | $ | 83.32 |
Average performance YTD | 12/31/01 | 12/31/02 | 12/31/03 | 12/31/04 | 03/31/04 | 03/31/05 | ||||||
Total cash collections | $77.20 | $96.37 | $108.27 | $117.59 | $117.76 | $135.62 | ||||||
Non-legal cash collections | $66.87 | $77.72 | $ 80.10 | $ 82.06 | $ 85.56 | $ 95.71 |
1 Cash collections (assigned and unassigned) divided by total hours paid (including holiday, vacation and sick time) to all collectors (including those in training). |
2422
Cash collections have substantially exceeded revenue in each quarter since the Company’sour formation. The following chart illustrates the consistent excess of the Company’sour cash collections on itsour owned portfolios over the income recognized on finance receivables on a quarterly basis. The difference between cash collections and income recognized is referred to as payments applied to principal. It is also referred to as amortization. This amortization is the portion of cash collections that is used to recover the cost of the portfolio investment represented on the Statement of Financial Position.balance sheet.
(1) | Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from sales of defaulted consumer receivables. |
Seasonality
The Company dependsWe depend on the ability to collect on itsour owned and serviced defaulted consumer receivables. Collections tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year, due to consumer payment patterns in connection with seasonal employment trends, income tax refunds, and holiday spending habits. Due to the Company’sour historical quarterly increases in cash collections, itsour growth has partially masked the impact of this seasonality.
(1) | Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from sales of defaulted consumer receivables. |
2523
The following table shows the changes in finance receivables, including the amounts paid to acquire new portfolios.
Three Months | Three Months | Nine Months | Nine Months | Three Months | Three Months | |||||||||||||||||||
Ended | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | March 31, | March 31, | |||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||||||||||||||||||
Balance at beginning of period | $ | 96,270,285 | $ | 86,688,557 | $ | 92,568,557 | $ | 65,526,235 | $ | 105,188,906 | $ | 92,568,557 | ||||||||||||
Acquisitions of finance receivables, net of buybacks(1) | 10,821,842 | 11,978,443 | 37,626,129 | 50,849,497 | 17,735,629 | 14,678,341 | ||||||||||||||||||
Cash collections applied to principal(2) | (11,780,396 | ) | (8,830,582 | ) | (34,882,955 | ) | (26,539,314 | ) | (15,580,134 | ) | (11,619,112 | ) | ||||||||||||
Balance at end of period | $ | 95,311,731 | $ | 89,836,418 | $ | 95,311,731 | $ | 89,836,418 | $ | 107,344,401 | $ | 95,627,786 | ||||||||||||
Estimated Remaining Collections (“ERC”)(3) | $ | 286,735,182 | $ | 269,925,459 | $ | 286,735,182 | $ | 269,925,459 | $ | 313,855,339 | $ | 279,238,672 | ||||||||||||
(1) | Agreements to purchase receivables typically include general representations and warranties from the sellers covering account holders’ death or bankruptcy and accounts settled or disputed prior to sale. The seller can replace or repurchase these accounts. | |
(2) | Cash collections applied to principal (also referred to as amortization) on finance receivables consists of cash collections less income recognized on finance receivables. | |
(3) | Estimated Remaining Collections refers to the sum of all future projected cash collections on |
The following tables categorize the Company’sour owned portfolios as of September 30, 2004March 31, 2005 into the major asset types and account types represented, respectively:
Life to Date Purchased Face | Life to Date Purchased Face | |||||||||||||||||||||||||||||||||||||||
No. of | Value of Defaulted Consumer | Finance Receivables, net as of | No. of | Value of Defaulted | ||||||||||||||||||||||||||||||||||||
Asset Type | Accounts | % | Receivables(1) | % | September 30, 2004 | % | Accounts | % | Consumer Receivables(1) | % | ||||||||||||||||||||||||||||||
Visa/MasterCard/Discover | 2,316,764 | 39.9 | % | $ | 6,370,431,928 | 61.0 | % | $ | 58,956,527 | 61.9 | % | 2,635,187 | 41.0 | % | $ | 6,849,510,342 | 58.1 | % | ||||||||||||||||||||||
Consumer Finance | 2,231,543 | 38.3 | % | 1,865,349,210 | 17.9 | % | 11,018,375 | 11.6 | % | 2,386,386 | 37.1 | % | 2,009,208,692 | 17.1 | % | |||||||||||||||||||||||||
Private Label Credit Cards | 1,213,779 | 20.8 | % | 1,832,531,484 | 17.5 | % | 22,907,998 | 24.0 | % | 1,225,625 | 19.1 | % | 1,854,698,419 | 15.7 | % | |||||||||||||||||||||||||
Auto Deficiency | 60,267 | 1.0 | % | 376,476,448 | 3.6 | % | 2,428,831 | 2.5 | % | 182,171 | 2.8 | % | 1,069,484,968 | 9.1 | % | |||||||||||||||||||||||||
Total: | 5,822,353 | 100.0 | % | $ | 10,444,789,070 | 100.0 | % | $ | 95,311,731 | 100.0 | % | 6,429,369 | 100.0 | % | $ | 11,782,902,421 | 100.0 | % | ||||||||||||||||||||||
(1) | The Life to Date Purchased Face Value of Defaulted Consumer Receivables represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks. |
24
As shown in the following chart, as of March 31, 2005 a majority of our portfolios are secondary and tertiary accounts but we purchase or service accounts at any point in the delinquency cycle.
Life to Date Purchased Face | ||||||||||||||||
Value of Defaulted | ||||||||||||||||
Account Type | No. of Accounts | % | Consumer Receivables(1) | % | ||||||||||||
Fresh | 178,111 | 2.8 | % | $ | 574,045,987 | 4.9 | % | |||||||||
Primary | 906,154 | 14.1 | % | 2,313,600,523 | 19.6 | % | ||||||||||
Secondary | 1,687,658 | 26.2 | % | 3,162,867,494 | 26.8 | % | ||||||||||
Tertiary | 2,822,623 | 43.9 | % | 3,616,717,758 | 30.7 | % | ||||||||||
Other | 834,823 | 13.0 | % | 2,115,670,659 | 18.0 | % | ||||||||||
Total: | 6,429,369 | 100.0 | % | $ | 11,782,902,421 | 100.0 | % | |||||||||
(1) | The Life to Date Purchased Face Value of Defaulted Consumer Receivables represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks. |
As shown in the following chart, as of September 30, 2004 a majority of the Company’s portfolios are secondary and tertiary accounts but it purchases or services accounts at any point in the delinquency cycle.
Life to Date Purchased Face | ||||||||||||||||||||||||
Value of Defaulted Consumer | Finance Receivables, net as of | |||||||||||||||||||||||
Account Type | No. of Accounts | % | Receivables(1) | % | September 30, 2004 | % | ||||||||||||||||||
Fresh | 173,679 | 3.0 | % | $ | 566,347,968 | 5.4 | % | $ | 6,040,708 | 6.3 | % | |||||||||||||
Primary | 830,638 | 14.3 | % | 2,229,106,782 | 21.3 | % | 34,101,105 | 35.8 | % | |||||||||||||||
Secondary | 1,606,164 | 27.6 | % | 3,113,649,710 | 29.8 | % | 40,058,288 | 42.0 | % | |||||||||||||||
Tertiary | 2,637,205 | 45.3 | % | 2,887,338,520 | 27.6 | % | 11,395,904 | 12.0 | % | |||||||||||||||
Other | 574,667 | 9.8 | % | 1,648,346,090 | 15.9 | % | 3,715,726 | 3.9 | % | |||||||||||||||
Total: | 5,822,353 | 100.0 | % | $ | 10,444,789,070 | 100.0 | % | $ | 95,311,731 | 100.0 | % | |||||||||||||
26
The CompanyWe also reviewsreview the geographic distribution of accounts within a portfolio because it haswe have found that certain states have more debtor-friendly laws than others and, therefore, are less desirable from a collectibility perspective. In addition, economic factors and bankruptcy trends vary regionally and are factored into the Company’sour maximum purchase price equation.
As theThe following chart illustrates, as of September 30, 2004 the Company’ssets forth our overall life to date portfolio of defaulted consumer receivables is generally balanced geographically.geographically as of March 31, 2005:
Life to Date Purchased Face | Life to Date Purchased Face | |||||||||||||||||||||||||||||||
No. of | Value of Defaulted | No. of | Value of Defaulted | |||||||||||||||||||||||||||||
Geographic Distribution | Accounts | % | Consumer Receivables(1) | % | Accounts | % | Consumer Receivables(1) | % | ||||||||||||||||||||||||
Texas | 1,524,259 | 26 | % | $ | 1,538,010,796 | 15 | % | 1,659,093 | 26 | % | $ | 1,780,298,606 | 15 | % | ||||||||||||||||||
California | 519,714 | 9 | % | 1,286,405,838 | 12 | % | 555,726 | 9 | % | 1,366,158,323 | 12 | % | ||||||||||||||||||||
Florida | 359,005 | 6 | % | 985,298,231 | 9 | % | 408,209 | 6 | % | 1,168,070,321 | 10 | % | ||||||||||||||||||||
New York | 261,842 | 4 | % | 761,634,905 | 7 | % | 287,800 | 4 | % | 824,804,361 | 7 | % | ||||||||||||||||||||
Pennsylvania | 146,167 | 3 | % | 367,434,669 | 4 | % | 162,752 | 3 | % | 417,981,310 | 4 | % | ||||||||||||||||||||
North Carolina | 163,051 | 3 | % | 404,726,613 | 3 | % | ||||||||||||||||||||||||||
Illinois | 200,882 | 3 | % | 328,771,944 | 3 | % | 212,735 | 3 | % | 362,810,990 | 3 | % | ||||||||||||||||||||
North Carolina | 137,595 | 2 | % | 324,791,308 | 3 | % | ||||||||||||||||||||||||||
New Jersey | 116,306 | 2 | % | 348,367,587 | 3 | % | ||||||||||||||||||||||||||
Ohio | 165,803 | 3 | % | 295,622,870 | 3 | % | 181,177 | 3 | % | 345,227,512 | 3 | % | ||||||||||||||||||||
New Jersey | 101,129 | 2 | % | 294,630,896 | 3 | % | ||||||||||||||||||||||||||
Georgia | 111,898 | 2 | % | 263,374,315 | 3 | % | 128,577 | 2 | % | 310,046,957 | 3 | % | ||||||||||||||||||||
Massachusetts | 113,927 | 2 | % | 262,136,068 | 3 | % | 124,775 | 2 | % | 288,080,359 | 2 | % | ||||||||||||||||||||
Michigan | 156,172 | 3 | % | 244,619,443 | 2 | % | 168,443 | 3 | % | 276,238,664 | 2 | % | ||||||||||||||||||||
South Carolina | 96,292 | 2 | % | 218,971,939 | 2 | % | 108,866 | 2 | % | 248,647,571 | 2 | % | ||||||||||||||||||||
Missouri | 238,379 | 4 | % | 208,784,468 | 2 | % | 245,702 | 4 | % | 229,236,356 | 2 | % | ||||||||||||||||||||
Tennessee | 92,877 | 1 | % | 205,960,798 | 2 | % | ||||||||||||||||||||||||||
Maryland | 76,113 | 1 | % | 183,329,417 | 2 | % | 87,009 | 1 | % | 203,824,575 | 2 | % | ||||||||||||||||||||
Tennessee | 82,918 | 1 | % | 182,477,641 | 2 | % | ||||||||||||||||||||||||||
Other | 1,530,258 | 27 | % | 2,698,494,322 | 25 | %(2) | 1,726,271 | 26 | % | 3,002,421,518 | 25 | % | ||||||||||||||||||||
Total: | 5,822,353 | 100 | % | $ | 10,444,789,070 | 100 | % | 6,429,369 | 100 | % | $ | 11,782,902,421 | 100 | % | ||||||||||||||||||
(1) | The Life to Date Purchased Face Value of Defaulted Consumer Receivables represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks. | |
(2) | Each state included in “Other” represents less than 2% of the face value of total defaulted consumer receivables. |
25
Liquidity and Capital Resources
Historically, the Company’sour primary sources of cash have been cash flows from operations, bank borrowings, and equity offerings. Cash has been used for acquisitions of finance receivables, repayments of bank borrowings, purchases of property and equipment, and working capital to support the Company’sour growth.
The Company believesWe believe that funds generated from operations, together with existing cash and available borrowings under itsour credit agreement will be sufficient to finance itsour current operations, planned capital expenditure requirements, and internal growth at least through the next twelve months. However, the Companywe could require additional debt or equity financing if itwe were to make any other significant acquisitions requiring cash during that period.
27
Cash generated from operations is dependent upon the Company’sour ability to collect on itsour defaulted consumer receivables. Many factors, including the economy and the Company’sour ability to hire and retain qualified collectors and managers, are essential to itsour ability to generate cash flows. Fluctuations in these factors that cause a negative impact on the Company’sour business could have a material impact on itsour expected future cash flows.
The Company’sOur operating activities provided cash of $36.1$14.9 million and $22.6$8.0 million for the ninethree months ended September 30,March 31, 2005 and 2004, and 2003, respectively. In these periods, cash from operations was generated primarily from net income earned through cash collections and commissions received for the period which increased from $15.3$6.0 million for the ninethree months ended September 30, 2003March 31, 2004 to $19.7$8.9 million for the ninethree months ended September 30, 2004. The change in tax related accounts accounted for $12.7 million and $6.9 million of the increase in operating cash flow for the nine months ended September 30, 2004 and 2003, respectively.March 31, 2005. The remaining increase was due to changes in other accounts related to theour operating activities of the Company.activities.
The Company’sOur investing activities provided cash of $21.0 million and used cash of $4.7 million and $26.4$3.9 million during the ninethree months ended September 30,March 31, 2005 and 2004, and 2003, respectively. Cash used in investing activities is primarily driven by acquisitions of defaulted consumer receivables, net of cash collections applied to principal on finance receivables. Cash provided by investing activities is primarily driven by the sale of auction rate certificates.
The Company’sOur financing activities provided cash of $481,000$736,000 and $749,000$671,000 during the ninethree months ended September 30,March 31, 2005 and 2004, and 2003, respectively. Cash used in financing activities is primarily driven by payments on long term debt and capital lease obligations. Cash is provided by proceeds from debt financing and stock option exercises.
Cash paid for interest expenses was $206,000$64,000 and $241,000$69,000 for the ninethree months ended September 30,March 31, 2005 and 2004, and 2003, respectively. The interest expenses were paid for capital lease obligations and other long-term debt.
The Company maintainsWe maintain a $25.0 million revolving line of credit with RBC Centura Bank (“RBC”) pursuant to an agreement entered into on November 28, 2003.2003 and amended on November 22, 2004. The credit facility bears interest at a spread of 2.50% over LIBOR and extends through November 28, 2004.2006. The agreement provides for:
§ | restrictions on monthly borrowings are limited to 20% of Estimated Remaining Collections; | |||
§ | a debt coverage ratio of at least 8.0 to 1.0 calculated on a rolling twelve-month average; | |||
§ | a debt to tangible net worth ratio of less than 0.40 to 1.00; | |||
§ | net income per quarter of at least $1.00, calculated on a consolidated basis; and | |||
§ | restrictions on change of control. |
This facility had no amounts outstanding at September 30, 2004.March 31, 2005.
26
As of September 30, 2004March 31, 2005 there are five loans outstanding. On July 20, 2000, PRA Holding I,one of our subsidiaries entered into a credit facility for a $550,000 loan, for the purpose of purchasing a building and land in Hutchinson, Kansas. The loan bears interest at a variable rate based on LIBOR and consists of monthly principal payments for 60 months and a final installment of unpaid principal and accrued interest payable on July 21, 2005. On February 9, 2001, the Companywe entered into a commercial loan agreement in the amount of $107,000 in order to purchase equipment for itsour Norfolk, Virginia location. This loan bears interest at a fixed rate of 7.9% and matures on February 1, 2006. On February 20, 2002, PRA Holding Ione of our subsidiaries entered into an additional arrangement for a $500,000 commercial loan in order to finance construction of a parking lot at the Company’sour Norfolk, Virginia location. This loan bears interest at a fixed rate of 6.47% and matures on September 1, 2007. On May 1, 2003, the Companywe entered into a commercial loan agreement in the amount of $975,000 to finance equipment purchases for itsour Hampton, Virginia location. This loan bears interest at a fixed rate of 4.25% and matures on May 1, 2008. On January 9, 2004, the Companywe entered into a commercial loan agreement in the amount of $750,000 to finance equipment purchases at itsour newly leased Norfolk facility. This loan bears interest at a fixed rate of 4.45% and matures on January 1, 2009. The loans are collateralized by the related asset and require the Companyus to maintain net worth greater than $20,000,000$20 million and a cash flow coverage ratio of at least 1.5 to 1.0 calculated on a rolling twelve-month average.
28
Contractual Obligations
Obligations of the Company that exist Our contractual obligations as of September 30, 2004March 31, 2005 are as follows:
Payments due by period | Payments due by period | |||||||||||||||||||||||||||||||||||||||
Less | More | Less | More | |||||||||||||||||||||||||||||||||||||
than 1 | 1 - 3 | 4 - 5 | than 5 | than 1 | 1 - 3 | 4 - 5 | than 5 | |||||||||||||||||||||||||||||||||
Contractual Obligations | Total | year | years | years | years | Total | year | years | years | years | ||||||||||||||||||||||||||||||
Operating Leases | $ | 13,378,740 | $ | 1,464,288 | $ | 2,979,738 | $ | 3,143,937 | $ | 5,790,777 | $ | 13,948,468 | $ | 1,774,872 | $ | 3,517,136 | $ | 3,714,682 | $ | 4,941,778 | ||||||||||||||||||||
Long-Term Debt | 2,221,291 | 865,133 | 1,005,888 | 350,270 | — | 1,923,640 | 829,542 | 936,253 | 157,845 | — | ||||||||||||||||||||||||||||||
Capital Lease Obligations | 688,744 | 228,338 | 317,624 | 142,782 | — | 571,437 | 204,055 | 295,323 | 72,059 | — | ||||||||||||||||||||||||||||||
Purchase Commitments(1) | 6,120,608 | 1,640,608 | 4,480,000 | — | — | 11,692,439 | 9,119,939 | 2,415,000 | 157,500 | — | ||||||||||||||||||||||||||||||
Employment Agreements | 4,539,440 | 2,514,657 | 1,856,869 | 167,914 | — | 3,111,268 | 1,618,788 | 1,492,480 | — | — | ||||||||||||||||||||||||||||||
Total | $ | 26,948,823 | $ | 6,713,024 | $ | 10,640,119 | $ | 3,804,903 | $ | 5,790,777 | $ | 31,247,252 | $ | 13,547,196 | $ | 8,656,192 | $ | 4,102,086 | $ | 4,941,778 | ||||||||||||||||||||
(1) – Of this amount, $4,000,000 represents the potential payout the Company will
(1) Of this amount, $4,000,000 represents the potential payout we may incur as additional purchase price |
Off Balance Sheet Arrangements
The Company doesWe do not have any off balance sheet arrangements as defined by Regulation S-K 303(a)(4) promulgated under the Securities Exchange Act of 1934.
Recent Accounting Pronouncements
In October 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” This SOP proposes guidance on accounting for differences between contractual and expected cash flows from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Accordingly, we adopted SOP 03-03 on January 1, 2005. The SOP would limitlimits the revenue that may be accrued to the excess of the estimate of expected future cash flows over a portfolio’s initial cost of accounts receivable acquired. The SOP would requirerequires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. The SOP would freezefreezes the internal rate of return, referred to as IRR, originally estimated when the accounts receivable are purchased for subsequent impairment testing. Rather than lower the estimated IRR if the original collection estimates are not received, the carrying value of a portfolio would be is
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written down to maintain the original IRR. Increases in expected future cash flows would beare recognized prospectively through adjustment of the IRR over a portfolio’s remaining life. The SOP provides that previously issued annual financial statements would not need to be restated. Historically, as the Company haswe have applied the guidance of Practice Bulletin 6, the Company haswe have moved yields both upward and downward as appropriate under that guidance. However, since the new SOP guidance does not permit yields to be lowered, it will increase the probability of impairment charges going forward.
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in the future.
In March 2004, the Financial Accounting Standards Board (“FASB”) issued an Exposure Draft, “Share-Based Payment, an amendment of FASB Statements No. 123 and 95.” This proposed Statement would neither change the accounting in FASB Statement No. 123, “Accounting for Stock-Based Compensation,” for transactions in which an enterprise exchanges its equity instruments for services of parties other than employees nor change the accounting for stock ownership plans, which are subject to AICPA Statement of Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans.” The Board intends to reconsider the accounting for those transactions and plan in a later phase of its project on equity-based compensation. In this proposed Statement, the Board believes that employee services received in exchange for equity instruments give rise to recognizable compensation cost as the services are used in the issuing entity’s operations. In addition, the proposed Statement would require that public companies measure the compensation cost related to employee services received in exchange for equity instruments issued based on the grant-date fair value of those instruments. The Board will also consider other items such as streamlining volatility assumptions and addressing the fair value measurement models. On October 13, 2004,April 14, 2005, the FASB delayed the effective date tofor annual periods beginning after June 15, 2005, rather thenthan January 1, 2005 as originally proposed. In addition, the FASB recently decided to include in the proposed statement two transition methods: one that provides for prospective treatment and one that provides for retrospective application. The FASB is expected to issue its final standard before December 31, 2004. Management will continue to assess the potential impact this statement will have on the Company;us; however, the Company haswe have adopted SFAS 123 and currently expensesexpense all equity-based compensation in the current period.
Critical Accounting PolicyPolicies
The Company utilizespreparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations require our management to make judgments, assumptions, and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
Management believes our critical accounting policies and estimates are those related to revenue recognition, valuation of acquired intangibles and goodwill and income taxes. Management believes these policies to be critical because they are both important to the portrayal of our financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.
Revenue Recognition
We acquire loans that have experienced deterioration of credit quality between origination and our acquisition of the loans. The amount paid for a loan reflects our determination that it is probable we will be unable to collect all amounts due according to the loan’s contractual terms. At acquisition, we review each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that we will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, we determine whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics. We consider expected prepayments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio of loans and subsequently aggregated pools of loans. We determine the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference) based on our proprietary acquisition models. The remaining amount, representing the
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excess of the loan’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining life of the loan or pool (accretable yield).
Prior to January 1, 2005, we accounted for our investment in finance receivables using the interest method under the guidance provided byof Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans,Loans.” Effective January 1, 2005, we adopted and began to determine income recognizedaccount for our investment in finance receivables using the interest method under the guidance of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer.” For loans acquired in fiscal years beginning prior to December 15, 2004, Practice Bulletin 6 is still effective; however, Practice Bulletin 6 was amended by SOP 03-03 as described further in this note. For loans acquired in fiscal years beginning after December 15, 2004, SOP 03-03 is effective. Under the guidance of SOP 03-03 (and the amended Practice Bulletin 6), static pools of accounts are established. These pools are aggregated based on finance receivables. Under this method, eachcertain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of receivables it acquiresacquisition paid to third parties, and is statistically modeled to determine its projected cash flows. A yield is then established which, when applied to the outstanding balance of the receivables, results inaccounted for as a single unit for the recognition of income, atprincipal payments and loss provision. Once a constant yield relativestatic pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). SOP 03-03 (and the amended Practice Bulletin 6) requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. The SOP initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning after December 15, 2004 under SOP 03-03 and the amended Practice Bulletin 6, rather than lowering the estimated IRR if the collection estimates are not received, the carrying value of a pool would be written down to maintain the then current IRR. Income on finance receivables is accrued quarterly based on each static pool’s effective IRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. Likewise, cash flows that are less than the accrual will accrete the carrying balance. The IRR is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using our proprietary collection models. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, we use the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until we have fully collected the cost of the portfolio, or until such time that we consider the collections to be probable and estimable and begin to recognize income based on the interest method as described above.
We establish valuation allowances for all acquired loans subject to SOP 03-03 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the loans. At March 31, 2005, we had no valuation allowance on our finance receivables. Prior to January 1, 2005, in the pool.event that estimated future cash collections would be inadequate to amortize the carrying balance, an impairment charge would be taken with a corresponding write-off of the receivable balance.
We utilize the provisions of Emerging Issues Task Force 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”) to commission revenue from our contingent fee and skip-tracing subsidiaries. EITF 99-19 requires an analysis to be completed to determine if certain revenues should be reported gross or reported net of their related operating expense. This analysis includes an assessment of who retains inventory/credit risk, who controls vendor selection, who establishes pricing and who remains the primary obligor on the transaction. Each poolof these factors was considered to determine the correct method of recognizing revenue from our subsidiaries.
For our contingent fee subsidiary, revenue is analyzed monthly to assessrecognized at the actual performance to that expectedtime customer (debtor) funds are collected. The portfolios are owned by the model.clients and the collection effort is outsourced to our subsidiary under a commission fee arrangement. The clients retain control and ownership of the accounts we service. These revenues are reported on a net basis and are included in the line item “Commissions.”
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Our skip tracing subsidiary utilizes gross reporting under this EITF. We generate revenue by working an account and successfully locating a customer for our client. An “investigative fees” is received for these services. In addition, we incur “agent expenses” where we hire a third-party collector to effectuate repossession. In many cases we have an arrangement with our client which allows us to bill the client for these fees. We have determined these fees to be gross revenue based on the criteria in EITF 99-19 and they are recorded as such in the line item “Commissions,” primarily because we are primarily liable to the third party collector. There is a corresponding expense in “Outside Legal and Other Fees and Services” for these pass-through items.
We account for our gain on cash sales of finance receivables under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Gains on sale of finance receivables, representing the difference between the sales price and the unamortized value of the finance receivables sold, are recognized when finance receivables are sold.
We apply a financial components approach that focuses on control when accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, eliminates financial assets when control has been surrendered, and eliminates liabilities when extinguished. This approach provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.
Valuation of Acquired Intangibles and Goodwill
In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” we are required to perform a review of goodwill for impairment annually or earlier if indicators of potential impairment exist. The review of goodwill for potential impairment is highly subjective and requires that: (1) goodwill is allocated to various reporting units of our business to which it relates; (2) we estimate the fair value of those reporting units to which the goodwill relates; and (3) we determine the book value of those reporting units. If the estimated fair value of reporting units with allocated goodwill is determined to be less than their book value, we are required to estimate the fair value of all identifiable assets and liabilities of those reporting units in a manner similar to a purchase price allocation for an acquired business. This requires independent valuation of certain unrecognized assets. Once this process is complete, the amount of goodwill impairment, if any, can be determined.
We believe as of March 31, 2005 there was no impairment of goodwill. However, changes in various circumstances including changes in our market capitalization, changes in our forecasts, and changes in our internal business structure could cause one of our reporting units to be valued differently thereby causing an impairment of goodwill. Additionally, in response to changes in our industry and changes in global or regional economic conditions, we may strategically realign our resources and consider restructuring, disposing, or otherwise exiting businesses, which could result in an impairment of some or all of our identifiable intangibles, or goodwill.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with SFAS No. 109, “Accounting for Income Taxes,” the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are noted,measured using the yieldcurrently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.
We believe it is adjusted prospectivelymore likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to reflectfully recover the estimateremaining deferred tax assets. In the event that all or part of cash flows.the net deferred tax assets are determined not to be realizable in the future, a valuation allowance would be established and charged to earnings in the period such determination is made. Similarly, if we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive
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adjustment to earnings or a decrease in goodwill in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Company’sOur exposure to market risk relates to interest rate risk with itsour variable rate credit line. As of September 30, 2004, the CompanyMarch 31, 2005, we had no variable rate debt outstanding on itsour revolving credit lines. The CompanyWe did have variable rate debt outstanding on itsour long-term debt collateralized by the Kansas real estate. A 10% change in future interest rates on the variable rate credit line would not lead to a material decrease in future earnings assuming all other factors remained constant.
Item 4. Controls and Procedures
The Company maintainsEvaluation of Disclosure Controls and Procedures.We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in the Company’sour Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms, and that such information is accumulated and communicated to the Company’sour management, including itsour Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As Also, projections of any evaluation of effectiveness to future periods are subject to the endrisk that controls may become inadequate because of changes in conditions or that the period covered by this report,degree of compliance with the Company carried outpolicies or procedures may deteriorate. We conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officerour principal executive officer and the Company’s Chief Financial Officer,principal financial officer, of the effectiveness of the Company’sour disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.as of the end of the period covered by this report. Based on this evaluation, the foregoing, the Company’s Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer have concluded that, the Company’sas of March 31, 2005, our disclosure controls and procedures were effectiveeffective.
Management’s Report on Internal Control Over Financial Reporting.We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in timely alertingExchange Act Rules 13a-15(f) or 15d-15(f) as a process designed by, or under the Company’ssupervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to material information relating toprovide reasonable assurance regarding the Company required to bereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management’s assessment was based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management has determined that, as of December 31, 2004, its internal control over financial reporting was effective. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 was audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report dated March 14, 2005 included in our Annual Report on Form 10-K as filed for the Company’s Exchange Act reports.year ended December 31, 2004.
Changes in Internal Control Over Financial Reporting.There have beenwas no significant changeschange in the Company’sour internal controlscontrol over financial reporting that could significantly affect the internal controlsoccurred during the last quarter.quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) |
31.1 | Section 302 Certifications of Chief Executive Officer and Chief Financial Officer. | |||
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer. |
(b) | Reports on Form | |||
Filed | ||||
Filed |
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PORTFOLIO RECOVERY ASSOCIATES, INC. (Registrant) | ||||
Date: | By: | /s/ Steven D. Fredrickson | ||
Steven D. Fredrickson | ||||
Chief Executive Officer, President and | ||||
Chairman of the Board of Directors | ||||
(Principal Executive Officer) | ||||
Date: | By: | /s/ Kevin P. Stevenson | ||
Kevin P. Stevenson | ||||
Chief Financial Officer, Executive Vice President, | ||||
Treasurer and Assistant Secretary | ||||
(Principal Financial and Accounting Officer) |
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